CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits
A highly leveraged firm's shareholders approve a plan to replace a low-risk project with a much riskier one offering a higher potential payoff, without informing bondholders. This situation is best described as a conflict between:
This is a shareholder-creditor conflict over risk-taking. Shareholders capture the upside of the riskier project, while creditors with fixed claims bear the greater default risk, particularly in a highly leveraged firm. The scenario involves neither pay nor majority-minority treatment.
- Amanagers and employees over compensation structure
- Bshareholders and creditors over the firm's risk-takingCorrect
- Cmajority shareholders and minority shareholders over dividends
Explanation
Shareholders gain from upside of risky projects while creditors have a fixed claim and bear downside risk, especially with high leverage. This shifts risk and value from creditors to shareholders, a shareholder-creditor conflict. No compensation or minority issue is described.
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