Explanation:
The correct answer is C because the potential for conflict between debtholders and shareholders is greater for long-term debt than for short-term debt. This is due to the extended time horizon of long-term debt, which exposes debtholders to increased risks from changes in business conditions, strategic shifts, and management behavior. Such factors amplify the principal-agent conflict in long-term debt arrangements.
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The potential for conflict between debtholders and shareholders is:
A
Lower for long-term debt compared to short-term debt.
B
Equal for both long-term and short-term debt.
C
Higher for long-term debt relative to short-term debt.