Severe Adverse Selection and Moral Hazard Problems Can Prevent the Formation

question 153

True/False

Severe adverse selection and moral hazard problems can prevent the formation of business relationships between principals and agents. For example, people may be unwilling to buy stock in a firm because they believe that managers may use that money for their own benefit rather than for the company's interests.

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Definitions:

Brokers

Individuals or firms that act as intermediaries between buyers and sellers in financial markets to facilitate transactions.

Raising Capital

The process by which a firm obtains money or funds to finance its operations, expansion, or investments.

Bonds

Bonds are fixed income instruments representing a loan made by an investor to a borrower, typically corporates or governments, which pay periodic interest payments and return the principal at maturity.

Security Analysis

The examination and evaluation of the various factors affecting the value of securities, such as stocks and bonds, to make investment decisions.