Shareholders may pass up profitable investments because the firm’s existing debt captures most of the project’s benefits. Chapter 5 presents theoretical foundations of the debt overhang problem and related issues. These include inefficient dividend policies and transferring assets away from companies with large amounts of debt to other companies. It explains then why renegotiations with creditors are important. The chapter then describes the flexibility idea of capital structure, which is related to the debt overhang problem and is very popular among managers. It helps explain why start-up and mature firms may have different approaches to debt policies. The end of the chapter discusses the problems of large debt in financial institutions and whether government bailouts can help solve problems related to it.