Why would management want to increase the riskiness of the firm? Why would this make bondholders unhappy?

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Why would management want to increase the riskiness of the firm? Why would this make bondholders unhappy?

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Why would management want to increase the riskiness of the firm? Why would this make bondholders unhappy?

Explanation & AnswerSolution by a verified expert

Explanation

When management wants to have stable NPV from a project in which funds are invested then firms invest in the projects which assures future cash flows without affecting the value of operations. But this also leads to increased risk to the firm.
 
By investing in the projects which assures future cash flows without affecting the value of operations then this would lead to a shift of funds from bondholders to shareholders. Therefore, this makes bondholders unhappy.

Verified Answer

By investing in risky projects the management is able to maintain NPV of a project.
 
There will be shifting of funds from bondholders to shareholders, making bondholders unhappy.

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