- Shareholders hold residual claim on firms CF- Asset substitution: the higher the level of debt, the more severe is the problem of risk shifting, i.e., the higher the incentives of borrowers to increase the volatility of cash flows ex post

- Debt overhang: new capital providers (of debt and equity) would have to incur investment costs but are not willing to do so because the project’s cash flows will first be used to provide debt service to incumbent debtholders

- Gambling for resurrection: owners and managers can have incentives to delay the liquidation of their company