Reasons for Conflict of Interest Between Shareholders and Bondholders

1. Different Risk Preferences:
   • Shareholders prefer high-risk, high-return projects as they stand to gain from increased profits, while bondholders favor low-risk projects to secure repayment.
2. Dividend Payments:
   • Shareholders may push for high dividend payouts, reducing cash reserves available for debt servicing, thus increasing default risk for bondholders.
3. Priority During Liquidation:
   • Bondholders are prioritized for repayment over shareholders during insolvency, creating conflicting objectives in financial distress scenarios.
4. Leverage and Additional Debt:
   • Shareholders may favor additional borrowing to finance growth, which increases the risk profile and reduces bondholder security.
5. Restrictive Covenants:
   • Bondholders often impose covenants limiting the company’s financial activities, which shareholders may perceive as restrictive to growth and profitability.