Which of the following best describes the relationship between financial distress, bankruptcy, and agency costs?

Question $12$Answer

a$.$

Bankruptcy eliminates agency costs as it typically involves the liquidation of the firm, thus resolving any conflicts between managers and shareholders

b$.$

Agency costs tend to decrease during financial distress as managers and shareholders work together more closely to avoid bankruptcy

c$.$

Financial distress and bankruptcy are synonymous terms, and they have no impact on agency costs because shareholders and managers always have aligned interests.

d$.$

Financial distress refers to a firm's inability to meet its debt obligations, which can lead to bankruptcy; however, agency costs are only associated with the separation of ownership and control, and are not influenced by financial distress

e$.$

Financial distress is a situation where a firm struggles to meet its financial obligations, which can increase agency costs due to conflicts between shareholders and debt holders, especially as the firm approaches bankruptcy