The managers of a firm seek to obtain a loan from a local bank. They tell the bank's loan officer that the loan is intended to finance an expansion in the company, but in reality they intend to use the funds to finance next month's payroll. This incident is an example of
A)the problem of asymmetric information.
B)the problem of the illiquidity of bank loans.
C)banks' failing to charge high enough interest rates on business loans.
D)a situation in which direct finance, rather than indirect finance, should have been employed.

Question

Quizplus · Accepted Answer

This incident is an example of the problem of asymmetric information, as the managers are providing false information to the bank about the intended use of the funds. Asymmetric information can lead to adverse selection and moral hazard problems in financial markets.

The Managers of a Firm Seek to Obtain a Loan