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We've seen that substituting equity for debt (such as through a leveraged recapitalization) allows managers to hold a larger fraction of the equity (for the
We've seen that 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.
Write few sentences on the agency problems associated with debt.
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