Question

How can leverage alter the incentives of managers?

Answer 1

Leverage means that firm will take debt route to expand its operations. As the leverage increases, the incentives for managers also increases to perform well. The reason for that is that increase in leverage means that there is less cash in hand available for them to spend on project which are not required. They have to take on projects which are profitable since they have to pay interest to the debt holders. Also, higher leverage means that high chances of financial distress if company does not perform well. So this will also result in their job loss. So they are highly motivated to save their job