General Studies · Debt Covenants and Agency Conflicts
In corporate debt agreements, negative covenants such as restrictions on asset sales, limitations on further indebtedness, and constraints on dividend payments are primarily incorporated to:
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1allow shareholders to take higher risks without any impact on the debt's credit rating
- 2exempt the firm from periodic financial audits by independent authorities
- 3reduce the agency conflict between shareholders and bondholders by protecting the lender's claim✓
- 4guarantee an increase in the annual stock price of the borrowing firm
Correct answer
reduce the agency conflict between shareholders and bondholders by protecting the lender's claim
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