Read the passage below and answer the question that follows.
In corporate finance, the free cash flow hypothesis posits that managers holding substantial uncommitted cash reserves tend to invest in value-destroying diversification rather than returning excess capital to shareholders. To mitigate this agency cost, financial economists traditionally advocate leveraging the firm through debt issuance, which obligates managers to disburse cash flow toward interest service. However, recent empirical analyses of high-tech firms challenge this uniform prescription. Critics of high leverage in technology sectors argue that in industries characterized by high asset specificity and volatile innovation cycles, debt commitments strip management of essential operational flexibility, significantly elevating the risk of financial distress during economic downturns. Furthermore, counter to the traditional view that debt disciplines managerial discretion, researchers observe that rigid debt covenants in R&D-intensive sectors frequently compel firms to execute premature liquidations of long-term projects with high net present value (NPV), ultimately subverting shareholder wealth maximization. Thus, while debt may effectively constrain managerial self-interest in mature, capital-intensive manufacturing industries, applying it indiscriminately as a governance mechanism across all corporate contexts ignores how structural differences in firm asset bases alter the tradeoff between agency costs and financial vulnerability.
Which of the following, if true, would most seriously weaken the critics' argument regarding the disadvantage of using debt leverage in high-tech firms?
- During industry downturns, creditors of R&D-intensive firms routinely restructure debt covenants to grant extensions rather than forcing liquidations, provided the firm's long-term projects retain high projected NPV.Answer
- BMature manufacturing firms with low asset specificity experience fewer managerial agency costs when maintaining low debt levels than high-tech firms maintaining high debt levels.
- CManagers at high-tech firms with low leverage are more likely to pursue acquisitions outside their primary technological domain than managers at high-tech firms with heavy debt burdens.
- DHigh-tech firms that rely on equity financing rather than debt issuance incur higher underwriting fees and greater dilution of shareholder voting rights during capital raises.
- EEmpirical studies confirm that high-tech firms operating in volatile market cycles experience significantly higher earnings variance than firms in mature manufacturing sectors.