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© 2014 Pearson Canada Inc.#
Analysis of adverse selection indicates that financial intermediaries, especially banks,
____.
A) 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
B) despite their success in overcoming free-rider problems, nevertheless play a minor role in
moving funds to corporations
C) provide better-known and larger corporations a higher percentage of their external funds than
they do to newer and smaller corporations which rely to a greater extent on the new issues
market for funds
D) must buy securities from corporations to diversify the risk that results from holding non-
tradable loans
Answer: A
Diff: 3 Type: MC Page Ref: 169
Skill: Recall
Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
hazard
The concept of adverse selection helps to explain all of the following except ____.
A) why firms are more likely to obtain funds from banks and other financial intermediaries,
rather than from the securities markets
B) why indirect finance is more important than direct finance as a source of business finance
C) why direct finance is more important than indirect finance as a source of business finance
D) why the financial system is so heavily regulated
Answer: C
Diff: 3 Type: MC Page Ref: 169
Skill: Recall
Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
hazard
The problem of adverse selection helps to explain ____.
A) which firms are more likely to obtain funds from banks and other financial intermediaries,
rather than from securities markets
B) why direct finance is more important than indirect finance as a source of business finance
C) why collateral is not an important feature of debt contracts
D) why banks prefer to make loans unsecured
Answer: A
Diff: 2 Type: MC Page Ref: 169
Skill: Recall
Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
hazard