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If a firm increases its debt to a very high level, then the positive impact of...

If a firm increases its debt to a very high level, then the positive impact of debt in aligning the interests of management with those of stockholders tends to become negative. Explain why this occurs.

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If firm will be increasing its debt to a very high level, then the positive impact of debt in alignment of the interest of management with those of shareholders are becoming negative because high amount of debt capital will be having a lot of risk associated with it because that will be having a fixed obligation attached to them and they can even cause the financial distress to the company so that there would be a high amount of debt in the overall company & It will mean that there is a risk existing to the need insolvency of the company in the long run and that will be leading to non alignment of interest of management with the shareholders as management are taking more debt in order to raise the profits of the company whereas it can be leading to rusk to the overall existence of the company in the long run and this could be also a risk to the overall solvency of the company in the long run so, the positive impact of debt alignment of the interest of the management with shareholders will be becoming negative due to a risk of insolvency.

jeff jeffy answered 2 years ago
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