Equity holders have an incentive to ________ the volatility of a firm's assets because they benefit from such an increase at a cost to ________.
A) decrease, debt holders
B) decrease, suppliers
C) increase, directors
D) increase, debt holders

Question

Quizplus · Accepted Answer

Equity holders benefit from an increase in the volatility of a firm's assets because their returns are tied to the performance of the firm. However, such an increase comes at a cost to debt holders as their likelihood of recovering their investment decreases in the face of greater risk. Therefore, equity holders have an incentive to increase the volatility of a firm's assets, even though it may not be in the best interest of other stakeholders such as debt holders.

Equity Holders Have an Incentive to ________ the Volatility of a Firm's