Question

True of False

Creditors lend money to the firm. Creditors have a claim on the firm's earnings stream and they have a claim on its assets in the event of bankruptcy. However but stockholders have control (through the managers) of decisions that affect the firm's riskiness. Creditors might write detailed debt covenants specifying what actions the company can and cannot take to minimize potential agency problems. The creditors might also charge a higher interest rate to protect themselves in case the company engages in activities which increase risk.

Answer 1

This given Statement is true as creditors provides credit with many term and conditions. They have a credit risk associated with their debt and they want to protect themselves so they have a representative of themselves in the board and who can look into the matters of the internal affairs of the company too.

They will object to contracts which will provide them with a feeling that the prospect of contract is going to limit the chances of recovery of their debts. So they have a high degree of intervention into the affairs of the company.

Creditors also have written detailed debt covenants as to what to do and what not to do in relation with several other borrowing. So, They act against any contract which hamper the aspects of recovery of their own debts.

So the given Statement is TRUE.