Exam 8: An Economic Analysis of Financial Structure

With regard to external sources of financing for nonfinancial businesses in Canada, which of the following are accurate statements?

The "lemons problem" is a term used to describe the ________.

One way of describing the solution that high net worth provides to the moral hazard problem is to say that it ________.

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

The free-rider problem occurs because ________.

Equity contracts account for a small fraction of external funds raised by Canadian businesses because ________.

Analysis of adverse selection indicates that financial intermediaries, especially banks, ________.

The principal-agent problem ________.

One financial intermediary in our financial structure that helps to reduce the moral hazard from arising from the principal-agent problem is the ________.

Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that ________.

The concept of adverse selection helps to explain all of the following except ________.

Bundling investors funds together ________.

Canadian businesses get their external funds primarily from ________.

Explain how high net worth and collateral reduce the problem of moral hazard.

Of the sources of external funds for nonfinancial businesses in Canada, stocks account for approximately ________ of the total.

The ________ problem helps to explain why the private production and sale of information cannot eliminate ________.

Collateralized debt is also know as ________.

That most used cars are sold by intermediaries (i.e., used car dealers)provides evidence that these intermediaries ________.

Explain how government regulation can lessen asymmetric information problems but not eliminate them using Enron as an example.

Direct finance involves the sale to ________ of marketable securities such as stocks and bonds.