While Debt Can Reduce Agency Costs Between Shareholders and Management

question 56

Multiple Choice

While debt can reduce agency costs between shareholders and management,

• A)excessive debt may also induce the risk-averse managers to forgo profitable but risky investment projects, causing an underinvestment problem.
• B)with debt financing companies can misuse debt to finance corporate empire building.
• C)both a and b
• D)none of the above

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Definitions:

Product Liability

Legal responsibility of a manufacturer or seller to compensate for injury or damages caused by a defective product.

Fault

The responsibility or blame for a mistake or wrongdoing.

Unforeseeable Misuses

Situations or actions where a product is used in a way that could not have been predicted, possibly leading to harm or injury.

Obvious Dangers

Hazards or risks that are apparent and should be reasonably recognized by an individual, reducing or eliminating liability for injuries resulting from such dangers.