2. Titman (1984) argues that the liquidation of a firm may impose costs on both customers and employees. As a result, they demand risk premiums on products and wages when leverage increases. These costs are transferred to the shareholders.

However, if the shareholders commit to liquidate only when the gains exceed all costs, including those of customers and employees, this would increase the cost of capital. Titman shows that managers can use their firm’s capital structure to control these risk premiums. He argues that firms with higher liquidation costs to customers and employees will have less debt. Design a survey question or a set of questions to test Titman’s theory.