Where information asymmetry exists, the capital market may attract the wrong kind of company. This is known as
A) moral hazard.
B) conservative accounting.
C) adverse selection.
D) an inefficient marketplace.

Question

Quizplus · Accepted Answer

Adverse selection occurs when information asymmetry exists, leading the capital market to attract the wrong kind of company. This can happen when companies with poor-quality assets or high-risk projects choose to raise capital by selling securities, while companies with better-quality assets or lower-risk projects do not participate in capital markets. The result is a phenomenon known as adverse selection, where the investors end up holding securities of low quality, which could result in losses. The other options do not explain this phenomenon.

Where Information Asymmetry Exists, the Capital Market May Attract the Wrong