Acf
Agency Benefits of Debt - correct answer -ownership concentration
-reduce wasteful investment
-commitment to vigor
Managerial Entrenchment - correct answer Manager faces little threat of being fired and replced.
Entrenchment may allow managers to run the firm in their own best interests, not in best interest of
shareholders
Concentration of Ownership - correct answer -Debt financing allows the original owners of the firm to
maintain their equity stake.
-As major shareholders, they have strong interest in doing what is best for firm.
-with debt financing, owners reap more marginal value
-using leverage can benefit the firm by preserving ownership concentration and avoiding agency costs
-more skin in the game drives incentive alignment
Reduction in Wasteful Investment - correct answer -a concern for large corporations is that the manager
may make large, unprofitable investments
-empire building/managerial overconfidence ->motivates managers to make negative-NPV investments
Empire building hypothesis - correct answer -managers prefer to run larger firms rather than smaller
ones (higher pay)
-managers will take on investments that increase the size, but not necessarily the profitability of the firm
Overconfidence - correct answer -Managers over-invest because they are over-confident
-managers make mistakes
Agency Benefits of Debt - correct answer -ownership concentration
-reduce wasteful investment
-commitment to vigor
Managerial Entrenchment - correct answer Manager faces little threat of being fired and replced.
Entrenchment may allow managers to run the firm in their own best interests, not in best interest of
shareholders
Concentration of Ownership - correct answer -Debt financing allows the original owners of the firm to
maintain their equity stake.
-As major shareholders, they have strong interest in doing what is best for firm.
-with debt financing, owners reap more marginal value
-using leverage can benefit the firm by preserving ownership concentration and avoiding agency costs
-more skin in the game drives incentive alignment
Reduction in Wasteful Investment - correct answer -a concern for large corporations is that the manager
may make large, unprofitable investments
-empire building/managerial overconfidence ->motivates managers to make negative-NPV investments
Empire building hypothesis - correct answer -managers prefer to run larger firms rather than smaller
ones (higher pay)
-managers will take on investments that increase the size, but not necessarily the profitability of the firm
Overconfidence - correct answer -Managers over-invest because they are over-confident
-managers make mistakes
