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Why would shareholders prefer to shift to riskier projects at the expense of bondholders?

Why would shareholders prefer to shift to riskier projects at the expense of bondholders?

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Answer #1

Shareholders prefer to shift to riskier projects if the returns are higher so that it can pay off both shareholders and bond holders. The returns are higher in case of higher risk and if NPV is positive such projects should be undertaken.Moreover shareholders are claim residual profit whereas bond holder claim fixed payment. This also motivates shareholders to seek riskier projects. Bond holders don't gain from higher return but stand to lose huge on losses. However Bond bolder have first right in case of liquidation whereas shareholders don't have any right. Hence they want higher return for this risk.

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