ACT 2300 Lecture Notes - Lecture 9: Financial Transaction, Adverse Selection, Securitization
Document Summary
First problem arising from asymmetric information; the problem investors experience in distinguishing low-risk borrowers from high-risk borrowers before making an investment. In the stock market, as makes it difficult for any but the largest firm to sell stock. In the bond market, as leads to credit rationing. Likely to restrict opportunities for growth in younger firms and emerging sectors of the economy (software & bio tech) because it"s difficult to distinguish good firms from lemons. Investors are often reluctant to make any loans at high interests rates. Def: profits the firms have earned or funds raised from the owner of the firm. When investors have difficulty obtaining information on good firms, the cost of raising funds for those firms increases. Which results in many firms to grow primarily by investing internal funds. Since 1945, u. s. firms have raised more than two-thirds of funds needed internally. Public firms are required to provide balance sheets and income statements.
