Agency Costs and Capital Structure

In corporate finance, capital structure decisions play a vital role in a firm's financial strategy. One of the significant aspects affecting these decisions is agency costs, which arise due to conflicts of interest between shareholders and management. When companies are financed through debt, management might make decisions that benefit their interests rather than maximizing shareholder value. Understanding the impact of agency costs on capital structure is critical for analyzing how a firm can align interests and mitigate these costs.

The following statements describe the relationship between capital structure and agency costs. Which of the following statements is true regarding the effect of higher leverage on agency costs?