Exam 8: Financial Structure, Transaction Costs, and Asymmetric Information

The majority of external finance comes from corporate bond issues.

A possible problem with Sarbanes-Oxley is that it increases transactions costs for financial intermediaries.

To mitigate agency problems, the incentives of the employees should be closed aligned with the employer.

When banks refuse to lend to borrowers with low net worth, they are trying to alleviate moral hazard problems.

How does compensating company managers with stock help with agency problems? What is the potential problem with this solution?

Asymmetric information problems increase costs to both borrowers and lenders.

Which of the following is a technique lenders use to alleviate asymmetric information problems?

How does the free-rider problem affect the size of the firms with access to the IPO market?

The majority of funds raised by firms is done through internal finance.

Which of the following does NOT involve a financial intermediary?

Explain why some argue that collateral is used to minimize both adverse selection and moral hazard problems.

Joey's Bank decides to make loans only to agricultural firms. Explain the pros and cons of this decision in terms of diversification and specialization.

The majority of internal finance for firms comes from loans for intermediaries.

Legislation banning fraudulent financial documentation is intended to reduce

How do efficiency wages reduce agency costs? .

Sarbanes-Oxley was intended to reduce

Which of the following are examples of transactions costs faced by lenders?

What does IPO stand for? What is it?

Which of the following is a technique lenders use to alleviate moral hazard problems?

Banks commonly monitor the activities and check the credit ratings of borrowers. Which solves the moral hazard problem, and which solves the adverse selection problem? Explain briefly.