Conflict between Shareholders and the Creditors

Creditors lend to the firm at a rate which depends on the riskiness of the firm as perceived the creditors. The creditors provide the firm the finances for a specific time period. A lot can happen during that period The shareholders through the management may, for instance take up projects with a higher risk than was anticipated when the finances were granted. On the other hand, the shareholders may take up projects that have not agreed upon. Should these project fail the creditors stand to lose a great deal.

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