One reaction of firms to the adverse selection problem is to
A)rely on internal funds to finance investment.
B)use the stock market rather than the bond market to raise funds.
C)use the bond market rather than the stock market to raise funds.
D)borrow long-term rather than short-term.

Question

Quizplus · Accepted Answer

By relying on internal funds to finance investment, firms can avoid the adverse selection problem that arises when seeking external financing. This is because internal funds are already available to the firm and there is no need to go through the process of raising funds from outside investors, who may be reluctant to invest due to asymmetric information. Option B and C are not necessarily effective solutions to the adverse selection problem, as both the stock and bond markets can be subject to adverse selection. Borrowing long-term may be a good strategy in some cases, but it is not directly related to addressing the adverse selection problem.

One Reaction of Firms to the Adverse Selection Problem Is