Consider a company that is likely to go bankrupt in the next year. The bondholders may encourage the company to pursue risky negative-NPV projects in hopes that the company will avoid financial distress.

Question

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Bondholders typically prefer less risky projects to ensure they receive their payments, as they have a fixed claim on the company's assets. Risky projects increase the chance of default, which is not in the bondholders' interest.

Consider a Company That Is Likely to Go Bankrupt in the Next