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Debtholders possess a larger set

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Unlike equity, debt is unforgiving if the firm performs poorly. If a firm goes bankrupt, debtholders have the right to repossess funds and exercise their residual control rights about how the funds will be spent. Thus, under debt financing, debtholders possess a larger set of control rights than managers. Does this mean that a manager that wants to maintain control should finance more with equity?

Reference no: EM131166729

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