The main reason why banks are the leading source of external finance for businesses is
A)the interest rates on bank loans are usually lower than interest rates on corporate bonds.
B)banks have an information-cost advantage in reducing adverse selection problems.
C)interest paid on bank loans is deductible against the corporate income tax, whereas interest paid on corporate bonds is not.
D)government regulators encourage small businesses to obtain funding from banks.

Question

Quizplus · Accepted Answer

Banks have an information-cost advantage in reducing adverse selection problems. This means that banks have better access to information and can assess the creditworthiness of businesses more effectively, reducing the risk of lending to them. This advantage, coupled with the fact that banks can offer a range of financial services to businesses, makes them the leading source of external finance for businesses. The other options are not entirely accurate or are only partial reasons for why banks are the leading source of external finance.

The Main Reason Why Banks Are the Leading Source of External