More debt in a firm's capital structure provides managers with an incentive to maximize cash flows, but also makes them want to take on negative NPV projects.

Question

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More debt in a firm's capital structure does provide managers with an incentive to maximize cash flows due to the obligation to meet fixed interest payments. However, it does not incentivize them to take on negative NPV projects; rather, it might pressure them to avoid such projects to ensure financial stability and the ability to service the debt.

More Debt in a Firm's Capital Structure Provides Managers with an Incentive