The Problem of Adverse Selection Helps to Explain ________

question 21

Multiple Choice

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

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Definitions:

Analytical Measures

Techniques used to understand, interpret, and improve business performance through statistical and quantitative analysis.

Sound Judgment

The ability to make considered decisions or come to sensible conclusions.

Clean Audit Opinion

An auditor's report that states financial statements of a company are free from material misstatement and are presented fairly in accordance with the applicable financial reporting framework.

Unmodified Opinion

An auditor's report that concludes the financial statements of an entity present fairly its financial position, without any reservations.