FIN 475 Lecture Notes - Lecture 6: Agency Cost, Net Present Value, Capital Structure
Document Summary
Distress and they have no other options left may take actions that benefit shareholders creditors and lower the total value of the. Exploiting debt holders: the agency costs of leverage. The type of costs we describe in this section are examples of agency costs costs that arise when there are conflicts of interest between stakeholders. When a firm has leverage, a conflict of interest exists if investment decisions have different consequences for the value of equity and the value of debt. Such a conflict is most likely to occur when the risk of financial distress is high. In some circumstances, managers but harm the firm"s firm. When a firm is in financial than a fairly risky strategy, equity holders will always promote this. They have nothing left to lose, because if the firm files for bankruptcy, they lose their whole investment. The debt holders lose: if the strategy fails, they bear the loss.
