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Corporate Finance

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Conflict between Bondholders and Shareholders

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Suppose that managers do act in shareholders' interests, and the firm borrows money by issuing bonds. How might an agency conflict arise?

A

Bondholders will select too conservative directors to the board who will not maximize shareholder value by passing up riskier projects.

B

Shareholders and management choose too safe projects because they are indebted.

C

Bondholders do not know the quality of the projects and assets of the firm.

D

Shareholders and bondholders collude to underpay managers, thus exploiting them.

E

Shareholders and management choose riskier projects because shareholders only get the upside while bondholders risk losing their principal if the downside occurs.