How can the use of debt serve to discipline managers?

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How can the use of debt serve to discipline managers?

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How can the use of debt serve to discipline managers?

Explanation & AnswerSolution by a verified expert

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Debt requires a commitment to pay fixed amounts of money at fixed intervals.

Explanation

Debt is a form of discipline because without it there would be additional cash flow that could be tapped by managers for their pet projects (projects that may not contribute to greater value for the firm).

Verified Answer

The use of debt can discipline managers because incurring debt gives rise to a commitment to servicing the loan, hence, limiting cash for expenditures that might benefit managers but not stockholders.

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