Agency conflicts between shareholders and creditors

While the agency conflicts between managers and shareholders tend to receive the most press, they are not the only agency conflict affecting the modern corporation. Another equally important agency conflict is sometimes observed between a firm's common shareholders and its bondholders. As before, the basis of this conflict is divergent concerns and motives. In general, bondholders purchase corporate securities that provide a

$$ return, whereas shareholders purchase shares that are likely to provide a return that fluctuates with the riskiness of the firm.

If managers undertake projects that decrease the riskiness of the firm and its cash flows, then wealth of the firm's bondholders will be

$q,\_,$ while that of the firm's shareholders will be $$