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[2] Explain why the leverage ratchet effect is the agency cost of leverage. (7 points) Leverage Ratchet Effect - Shareholders may have an incentive to

[2] Explain why the leverage ratchet effect is the agency cost of leverage. (7 points)

Leverage Ratchet Effect - Shareholders may have an incentive to increase (or not decrease) leverage even if it decreases (or increase) the value of the firm.

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