The Presence of a Large Amount of Debt Can Encourage

question 9

Multiple Choice

The presence of a large amount of debt can encourage shareholders to take excessive risk because ________.

• A) equity holders are risk seeking by nature
• B) the costs of failure are borne largely by debt holders
• C) debt holders are risk seeking
• D) firm value increases with risk taking

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Definitions:

Classical Conditioning

A learning process that occurs through associations between an environmental stimulus and a naturally occurring stimulus.

Psychological Reactance

A motivational reaction to offers, persons, rules, or regulations that threaten or eliminate specific behavioral freedoms.

Attitude Inoculation

A method of making individuals resistant to attempts to change their attitudes by initially exposing them to small arguments against their beliefs.

Self-Presentational Concerns

The efforts individuals make to create specific impressions of themselves in the minds of others.