Question

Discuss the reasons behind the conflict of interest between corporate stockholders and bondholders.

Answer 1

Reasons behind conflict of interest between bondholders and stockholders as follows-

A. Stockholders will always be wanting to maximize their overall value of market shares through taking additional risk whereas Bond holder will never be wanting that it should be taken by business because it will lead to a risk related to solvency of the business.

B. stockholder will want to take additional debt capital in order to maximize their growth whereas debtcapital holders will not be wanting that additional debt should be taken because that will be causing additional risk on the business.

C. Equity shareholders will want that it is highly risky projects should be undertaken because they can be helpful in maximization of their overall value whereas bondholders will be objecting to them.

So, bondholders and equity shareholders have different focus because bondholders will always be wanting that their overall principal as well as interest are repaid in full, equity shareholders will want that adequate risk shouldshould be taken in order to maximize their overall value.