The basic idea of risk shifting is that the forms most susceptible to this problem are those for which most of firm value comes from assets in place and new investment is not an important contributor to value. a borrower in distress has the incentive to consider risky investment alternatives that offer some chance of recovery from insolvency a borrower in distress has the incentive to consider the largest scale investment alternatives as a means of recovering from insolvency. a firm should invest in low-risk projects that add value that will most likely only benefit creditors who are likely to take over the firm in bankruptcy