Equity Contracts Account for a Small Fraction of External Funds

question 8

Multiple Choice

Equity contracts account for a small fraction of external funds raised by Canadian businesses because ________.

• A) costly state verification makes the equity contract less desirable than the debt contract
• B) of the reduced scope for moral hazard problems under equity contracts, as compared to debt contracts
• C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt
• D) there is no moral hazard problem when using a debt contract

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Definitions:

Conceptualizing The Future

The process of envisioning and planning for future trends, changes, and developments in an industry or society.

Myopia

Short-sightedness in planning and decision-making, where immediate benefits are prioritized over long-term gains.

Behavioral Economics

studies the effects of psychological, cognitive, emotional, cultural, and social factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and resource allocation.