Explain verbally and quantitatively why the "leverage ratchet effect" leads to the agency cost of leverage, based on EXAMPLE 16.7

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

Example 16.7

Debt Overhang and the Leverage Ratchet Effect Problem Show that Baxter's shareholders would not gain by reducing leverage from $1 million to $400,000, even though firm value would increase by eliminating the cost of underinvestment. Debt Overhang and the Leverage Ratchet Effect Problem Show that Baxter's shareholders would not gain by reducing leverage from $1 million to $400,000, even though firm value would increase by eliminating the cost of underinvestment