One Implication of Information Asymmetry Between Investors and Firm Managers

question 80

True/False

One implication of information asymmetry between investors and firm managers is that if the firm raises new capital by issuing debt rather than by selling stock, it will signal that the firm has very good prospects.

---

Definitions:

Fair Market Value

An estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would likely pay to a knowledgeable, willing, and unpressured seller in the market.

Business Judgment Rule

A legal principle protecting corporate directors and officers from liability for decisions made in good faith and in the best interest of the company.

Derivative Action

A lawsuit brought by a corporation’s shareholder on behalf of the corporation against a third party, often an insider of the corporation.

Uncertificated

Referring to securities or stocks that are not represented by a physical certificate, existing only as electronic records.