How does the presence of restrictive debt covenants affect management flexibility?

Restrictive debt covenants are agreements between a borrower and a lender that impose certain limitations on the borrower's actions to protect the lender's investment. Such covenants can dictate specific financial ratios that must be maintained, restrict certain business activities, or limit the company's ability to incur additional debt.

In this context, the correct answer is that restrictive debt covenants reduce management flexibility. When a company is bound by these covenants, management must navigate its decisions within the constraints set by the lenders. This could mean avoiding certain investments or operational strategies that might otherwise benefit the company, ensuring compliance with financial metrics, or steering clear of actions that could breach the covenants and trigger penalties or default. As a result, management has less freedom to respond to changing market conditions, pursue growth opportunities, or make decisions that could enhance the company's value.

The other options suggest increasing flexibility, having no impact, or leading to better opportunities, all of which do not accurately reflect the nature of restrictive covenants. They typically impose limitations rather than provide room for maneuvering, thus firmly establishing the correct answer.