Moral Hazard Is NOT Eliminated in Debt Financing Because

question 108

Multiple Choice

Moral hazard is NOT eliminated in debt financing because

• A) borrowers have an incentive to assume greater risk than is in the interest of the lender.
• B) firms with a great deal of debt often go bankrupt.
• C) principal-agent problems are greater with debt financing than with equity financing.
• D) the use of restrictive covenants tends to increase moral hazard.

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