 In case of leverage, conflict of interest may rise in the relationship between the stockholders of a firm and its debt holders. There may also be a possibility of rising the conflict of interest between the firm's stockholders and its top managers. Because the firm's managers may develop their own interest, those are different from the interest of the shareholders and the debt holders of the firm. On that particular case, there is a possibility of the management and punishment. That is the risk of threat being faced by the managers. And then the managers start working in their own interest and in this particular case, the managerial decisions start benefiting the managers at the expense of the firm. Now let's see that how leverage induces a firm's manager to run the firm effectively and efficiently. First, there is an issue of concentration of ownership. You see that the leverage allows the firm's original owners to keep their whole stake in the firm because a new equity issue needs to sacrifice a proportional stake for the new coming owners in the firm in order to get new amount of money. And due to this, there is more likely that the original owners will work lesser than the earlier, but they will overspend more on their personal luxuries and other perks as this cost of additional perks and luxuries on the original managers, original shareholders will be borne by the coming new shareholders. But issuing debt in place of a new equity will allow the original owners to retain his full interest and stake in the equity of the firm's assets. The cost of reduced efforts and excessive spending on the perks are a type of agency cost because this type of cost arise due to the ownership dilution that occur on the occasion of new equity issue. In fact, who pays these agency costs? If securities are fairly priced, then the firm's original owners pay these types of costs because the new investors discount the price to reflect lower effort and high spending on the perks. The leverage allows a firm to protect ownership concentration and avoid any such agency costs. The leverage may also work to reduce wasteful investments by managers in the firm for any growing firm ownership typically dilutes over time because the managers cannot replace the original owners' retirement due to limited resources with the managers. Debt cannot be the sole source of additional capital and finally the owners may sell their stock stakes to buy a well-diversified portfolio to reduce their financial risk. The agency conflict can be controlled through monitoring and accountability standards at an appropriate level. Overspending on personal perks may likely be small relative to the overall value of the firm's assets. Managers in that particular larger-scale firm may start a negative NPV investment for their empire building due to the reasons like they prefer to run large firms, they take investments that increases the firm's size rather than the profitability of the firm. Managers of large firm earn higher salaries, they have more prestige, they have garnered their greater publicity and the result of these activities is that such managers may expand or fail to shut down unprofitable divisions in their firms. These managers pay too much for acquisition, these managers make unnecessary capital investments and they also hire unnecessarily the employees in the firm. The managers in these large firms may overinvest due to being overconfident in themselves. Acting in the owner's best interest, these managers may also make certain mistakes like having bullish tendency on the firm's better prospects, they believe that new opportunities are more better than the existing projects. These managers may become committed to the firm's existing investments and continue to invest in the projects that the firm at present needs to discontinue or shut down. Now, to control these managers' overspendings, there is a pre-cash flow hypothesis that states that the managers go for wasteful investments as the firm has higher amount of pre-cash flows. But a Titan policy on the cash motivates managers to run the firm efficiently because the leverage increases firm value as it binds a firm to make future debt and interest repayments. The leverage reduces extra cash flows and wasteful investment by the managers in these large firms. Leverage can also reduce the degree of the managerial infringement because the less entrenched managers may become more concerned about their performance and less likely to engage in wasteful investment spending. So creditors can monitor closely in the affairs of the highly levered firm. So this leverage as a tool provides an additional layer of management oversight. The threat of financial distress and being fired may commit managers more fully to pursue strategies that improving the operations of the firm. A highly levered firm may be a brutal and aggressive competitor in the sense that it cannot risk the possibility of its bank corruptism. So this aggressive behavior of the firm can scare off the other rivals in the industry that may become a potential competitor for the firm. But a firm may weekend due to the too much level of leverage and financially such type of weekend firm may become much fragile in a way that its competitors may erode its market.