Based on Historical Experience,which of the Following Best Describes the "Pecking

question 28

Multiple Choice

Based on historical experience,which of the following best describes the "pecking order" of long-term financing strategy in Europe?

• A)Long-term debt first,new ordinary equity,internal financing last.
• B)Long-term debt first,internal financing,new ordinary equity last.
• C)Internal financing first,new ordinary equity,long-term borrowing last.
• D)Internal financing first,long-term borrowing,new ordinary equity last.
• E)None of the above.

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Definitions:

Adverse Selection

Adverse selection is a situation in economics where one party in a transaction has more information than the other, often leading to an imbalance and unfavorable outcomes for one side.

Screening

A solution to the problem of adverse selection that describes the efforts of a less informed party to gather information about the more informed party. A successful screen means that it is unprofitable for bad types to mimic the behavior of good types. Any successful screen can also be used as a signal.

Signaling

A solution to the problem of adverse selection that describes an informed party’s effort to communicate her type, risk, or value to less informed parties by her actions. A successful signal is one that bad types won’t mimic. Any successful signal can also be used as a screen.

Anticipate Adverse Selection

The practice of predicting and mitigating the likelihood of selecting undesirable risks due to information asymmetry.