Leland and Pyle (1977) Examine the Effect of Informational Asymmetries

question 1

Multiple Choice

Leland and Pyle (1977) examine the effect of informational asymmetries on equilibrium corporate valuation and financial structure.The authors develop a signaling model and work through a specific example, focusing on optimal debt levels under conditions of asymmetric information.In their signaling model, an entrepreneur seeks financing for a project whose true value is known only to him.Clearly, direct transfer of information to lenders is impossible.Information may, however, be transferred by a credible signal.Here, the signal is:

• A)the entrepreneur's willingness to include debt in the firm's capital structure.
• B)the willingness of the entrepreneur to invest in his own project.
• C)the entrepreneur's ability to attract private equity capital.
• D)the entrepreneur's expressed willingness to remain as a manager of the firm.

---

Definitions:

Consistent Behaviors

Actions or responses that are uniform and stable over time in similar situations.

Learned Predisposition

An acquired tendency to respond in a consistent way to a given object or entity based on prior experiences and learning.

Favorable Way

A manner or approach that is advantageous, beneficial, or creates positive outcomes.

Maslow Hierarchy

A theory in psychology proposed by Abraham Maslow that categorizes human needs into a five-tier model, ranging from basic (physiological) needs to higher-level (self-actualization) needs.