Deck 8: Financial Structure, Transaction Costs, and Asymmetric Information

Question 1

When banks refuse to lend to borrowers with low net worth, they are trying to alleviate moral hazard problems.

Answer 1

True

Question 2

The two types of asymmetric information problems are moral hazard and agency problems.

Answer 2

False

Question 3

When venture capitalists take an active role in the management of a company they finance, they are trying to alleviate the moral hazard problem.

Answer 3

True

Question 4

The majority of external finance comes from corporate bond issues.

Question 5

Some transactions costs arise from agency problems.

Question 6

Intermediaries must charge higher rates of interest than individuals.

Question 7

The two types of asymmetric information problems are adverse selection and moral hazard.

Question 8

The majority of funds raised by firms is done through internal finance.

Question 9

Credit ratings help with the adverse selection problem inherent in lending

Question 10

When banks refuse to lend to borrowers at very high rates of interest, they are trying to alleviate the moral hazard problem.

Question 11

The majority of internal finance for firms comes from loans for intermediaries.

Question 12

When a child saves her allowance to buy a toy, she is engaged in external finance.

Question 13

Asymmetric information problems increase costs to both borrowers and lenders.

Question 14

Asymmetric information leads to allocational inefficiencies in financial markets.

Question 15

It is difficult to make profits selling information about stock market analysis due to the free rider problem.

Question 16

Asymmetric information leads to market inefficiencies.

Question 17

Interest on loans is an example of a transactions cost that intermediaries can deal with more efficiently than individuals.

Question 18

The majority of external finance for firms comes from stock issues.

Question 19

It is difficult to make profits in the mortgage market due to the free-rider problem.

Question 20

The cost of accounting fees is an example of a transactions cost that banks can deal with more efficiently than individuals.

Question 21

A possible problem with Sarbanes-Oxley is that in worsens the free-rider problem for financial intermediaries.

Question 22

Laws against fraudulent reporting on financial documents are an attempt to solve the free-rider problem.

Question 23

Which of the following is a technique lenders use to alleviate the adverse selection problem?

A) screening
B) monitoring borrower activity
C) legal restrictions on the use of funds
D) all of the above

Question 24

To mitigate agency problems, the incentives of the employees should be closed aligned with the employer.

Question 25

Which of the following is a technique lenders use to alleviate the moral hazard problem?

A) checking credit ratings
B) monitoring borrower activity
C) restrictive covenants
D) all of the above

Question 26

Specialized lending is intended to minimize adverse selection problems.

Question 27

A possible problem with Sarbanes-Oxley is that it increases transactions costs for financial intermediaries.

Question 28

Laws against fraudulent reporting on financial documents are an attempt to reduce agency problems.

Question 29

Which of the following is a technique lenders use to alleviate the adverse selection problem?

A) checking credit ratings
B) monitoring borrower activity
C) restrictive covenants
D) all of the above

Question 30

Which of the following is a technique lenders use to alleviate asymmetric information problems?

A) checking credit ratings
B) monitoring borrower activity
C) restrictive covenants
D) all of the above

Question 31

Which of the following does NOT involve a financial intermediary?

A) saving for retirement
B) buying a treasury bond from the government
C) buying stock online
D) all of the above

Question 32

Which are examples of external finance?

A) issuing commercial paper
B) stock sales
C) issuing bonds
D) all of the above

Question 33

Most external financing comes from bonds and equities.

Question 34

Which of the following is an example of a source of internal finance?

A) corporate bonds
B) withheld earnings
C) commercial loans
D) none of the above

Question 35

Which of the following is a technique lenders use to alleviate moral hazard problems?

A) specialized lending
B) diversified lending
C) requiring collateral
D) all of the above

Question 36

Diversified lending is intended to help alleviate agency problems.

Question 37

Transactional costs are any and all costs associated with completing an exchange.

Question 38

Which of the following is a technique lenders use to alleviate asymmetric information problems?

A) specialized lending
B) diversified lending
C) requiring collateral
D) all of the above

Question 39

Which of the following does NOT involve a financial intermediary?

A) saving for retirement
B) taking a loan to start a business
C) buying stock online
D) none of the above

Question 40

Diversified lending is intended to minimize transactions costs.

Question 41

Firms that pay efficiency wages are attempting to minimize

A) agency costs.
B) moral hazard problems.
C) asymmetric information.
D) all of the above.

Question 42

Deductibles on car insurance are solutions to the _____ problem for insurers.

A) adverse selection
B) moral hazard
C) free-rider
D) all of the above

Question 43

Asymmetric information:

A) decreases the efficiency of financial markets.
B) reduces the flow of funds to entrepreneurs.
C) injures the real economy
D) all of the above.

Question 44

Efficiency wages are _____ the level firms would have to pay to fill all their open positions.

A) higher than
B) lower than
C) equal to
D) none of the above

Question 45

The free-rider problem affects decisions of participants in

A) the stock market.
B) internal finance
C) both of the above.
D) neither of the above.

Question 46

Legislation banning fraudulent financial documentation is intended to reduce

A) agency costs.
B) moral hazard problems.
C) asymmetric information.
D) all of the above.

Question 47

Costly state verification means the same as

A) specialized lending.
B) agency costs.
C) monitoring.
D) all of the above.

Question 48

Sarbanes-Oxley was intended to reduce

A) asymmetric information.
B) allocational efficiency.
C) transactions costs.
D) all of the above.

Question 49

Transactions costs are

A) broker commissions.
B) legal fees.
C) monitoring costs.
D) all of the above.

Question 50

The free-rider problem affects the

A) stock market.
B) corporate bond market.
C) both of the above.
D) neither of the above.

Question 51

Banks are said to ration credit when they refuse to lend above a certain interest rate. The purpose of such a policy is to minimize _____ of lending.

A) adverse selection problems
B) moral hazard problems
C) transactions costs
D) all of the above

Question 52

Restrictive covenants are required by lenders to help solve the problem of

A) adverse selection.
B) moral hazard.
C) transactions costs.
D) all of the above.

Question 53

Specialized lending helps lenders solve the problem of

A) adverse selection.
B) moral hazard.
C) transactions costs.
D) all of the above.

Question 54

Sarbanes-Oxley may have unintentionally increased

A) asymmetric information.
B) allocational efficiency.
C) transactions costs.
D) all of the above.

Question 55

Which of the following is a technique lenders use to alleviate the moral hazard problem?

A) checking credit ratings
B) monitoring borrower activity
C) both of the above
D) none of the above

Question 56

Spinning, in relation to IPOs, is a practice that hurts

A) underwriters.
B) investors.
C) the company going public.
D) all of the above.

Question 57

Which of the following are examples of transactions costs faced by lenders?

A) accounting fees
B) legal fees
C) monitoring costs
D) all of the above

Question 58

Most external finance is channeled through intermediaries because of

A) asymmetric information.
B) agency costs.
C) monitoring costs.
D) none of the above.

Question 59

Specialized lending helps lenders solve the problem of

A) adverse selection.
B) moral hazard.
C) transactions costs.
D) all of the above.

Question 60

The free-rider problem affects decisions of participants in

A) the stock market.
B) IPOs.
C) both of the above.
D) neither of the above.

Question 61

Banks commonly monitor the activities and check the credit ratings of borrowers. Which solves the moral hazard problem, and which solves the adverse selection problem? Explain briefly.

Question 62

Give an example of monitoring and restrictive covenants the bank might require if you took a loan from a bank to open a clothing store.

Question 63

Does screening help minimize adverse selection of moral hazard problems? Explain briefly.

Question 64

During the housing crisis of 2008, many homeowners went "under water," meaning their home is worth less than the value of their mortgage. What solution to asymmetric information problems is affected? Why is this a problem for lenders?

Question 65

What are restrictive covenants? Are they directed at adverse selection or moral hazard problems?

Question 66

What is the free-rider problem in relation to the stock market?

Question 67

What transactions cost could arise from screening?

Question 68

What are stock options?

Question 69

Joey's Bank decides to make loans only to agricultural firms. Explain the pros and cons of this decision in terms of diversification and specialization.

Question 70

Explain why some argue that collateral is used to minimize both adverse selection and moral hazard problems.

Question 71

How does compensating company managers with stock help with agency problems? What is the potential problem with this solution?

Question 72

Credit rationing means that banks refuse to lend above a certain interest rate. Why would they do this? What does this policy have to do with adverse selection or moral hazard?

Question 73

How do efficiency wages reduce agency costs?
.

Question 74

How does the free-rider problem affect the size of the firms with access to the IPO market?

Question 75

What does IPO stand for? What is it?