Substituting equity for debt (such as through a leveraged recapitalization) allows managers to hold a larger fraction of the equity (for the same dollar investment). We've also seen that leverage can mitigate large-scale corporate waste, because debtholders (or bankruptcy judges) take over before too much value is destroyed.

However, while substituting equity for debt reduces some of the agency problems within organizations, it creates different agency problems.

What are some agency problems associated with debt? [Hint: review Jensen and Meckling's Big Idea]