Of the following sources of external finance for American nonfinancial? businesses, the least important is
stocks
Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are? true?
Stocks and? bonds, combined, supply less than one?half of the external funds.
Regulation of the financial system
ensures the stability of the financial system.
A? ________ is a provision that restricts or specifies certain activities that a borrower can engage in.
restrictive covenant
Which of the following is not one of the eight basic puzzles about financial? structure?
There is very little regulation of the financial system.
Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their? activities?
Sole? proprietorships, partnerships, and small corporations.
The following statements are not true except the one that indicates that
although banks are the most important source of external funds to businesses worldwide, their role is shrinking slightly over time
Which of the following statements is? true?
Firms raise more funds with bonds than with stocks.
Because of transaction costs in financial? markets, we can say that
some investors may find it more profitable to invest in something else other than financial markets.
One solution to the problem of high transaction costs is to bundle the funds of many investors to take advantage of
economies of scale
The problem created by asymmetric information before the transaction occurs is called? ________, while the problem created after the transaction occurs is called? ________.
adverse? selection; moral hazard
A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called
asymmetric information.
If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of
adverse selection.
An example of the? ________ problem would be if Brian borrowed money from Sean in order to purchase a used car and instead took a trip to Atlantic City using those funds.
moral hazard
The analysis of how asymmetric information problems affect economic behavior is called? ________ theory.
agency
Wealthy people often worry that others will seek to marry them only for their money. Is this a problem of adverse? selection?
Yes
Do you think the lemons problem would be more severe for stocks traded on the New York Stock Exchange or those traded? over-the-counter?
Stocks traded ________are more likely to be affected by the lemons problem.
over-the-counter
Would you be more willing to lend to a friend if she put all of her life savings into her business than you would if she had not done? so?
You would be more willing because putting her life savings into her business provides you protection against the problem of moral hazard
In December? 2001, Argentina announced it would not honor its sovereign? (government-issued) debt. Many investors were left holding Argentinean bonds priced at a fraction of their recent value.
Which of the following correctly summarizes the situation in
The risk on Argentinean debt? rose, its yield? rose, and its price fell.
How do standardized accounting principles help financial markets work more? efficiently?
They provide standardized information about a firm to combat the problem of asymmetric information.
How can the existence of asymmetric information provide a rationale for government regulation of financial? markets?
The production of information to combat these asymmetries is subject to the? free-rider problem
'The more collateral there is backing a? loan, the less the lender has to worry about adverse? selection.' Is this statement? true, false, or? uncertain?
This statement is________ because collateral ________ the adverse selection problem
true, reduces
Adverse selection is a problem associated with equity and debt contracts arising from
the? lender's relative lack of information about the? borrower's potential returns and risks of his investment activities.
In the United? States, the government agency requiring that firms that sell securities in public markets adhere to standard accounting principles and disclose information about their? sales, assets, and earnings is the
Securities and Exchange Commission.
A lesson of the Enron collapse is that government regulation
can reduce but not eliminate asymmetric information.
That most used cars are sold by intermediaries? (i.e., used car? dealers) provides evidence that these intermediaries
are able to prevent potential competitors from free?riding off the information that they provide.
Analysis of adverse selection indicates that financial? intermediaries, especially? banks,
have advantages in overcoming the free?rider ?problem, helping to explain why indirect finance is a more important source of business finance than is direct finance.
As information technology? improves, the lending role of financial institutions such as banks should? ________.
decrease
Net worth can perform a similar role to? ________.
collateral
A problem for equity contracts is a particular type of? ________ called the? ________ problem.
moral? hazard; principal?agent
Managers? (________) may act in their own interest rather than in the interest of the stockholder?owners ?(________) because the managers have less incentive to maximize profits than the stockholder?owners do.
agents; principals
The name economists give the process by which stockholders gather information by frequent monitoring of the? firm's activities is
costly state verification.
Government regulations designed to reduce the moral hazard problem include
laws that force firms to adhere to standard accounting principles.
One financial intermediary in our financial structure that helps to reduce the moral hazard from arising from the principal?agent problem is the
venture capital firm.
A venture capital firm protects its equity investment from moral hazard through which of the following? means?
It places people on the board of directors to better monitor the borrowing? firm's activities.
Which of the following statements is not true
over 90% of American households own securities
Because of transaction costs in financial? markets, we can say that
investors are less likely to invest in different stocks