__________ occurs because firms have an incentive to become riskier after their loans are funded.
A) Moral hazard
B) Adverse selection
C) Manager-stockholder conflict
D) Manager-lender conflict

Question

Quizplus · Accepted Answer

Moral hazard refers to the possibility that one party may take risks because they know that another party bears the cost of those risks. In this case, firms may become riskier after their loans are funded because they know that the lenders bear the cost of any losses that may occur. This creates an incentive for the firms to behave recklessly or take on more risk than they otherwise would if they were using their own funds.

__________ Occurs Because Firms Have an Incentive to Become Riskier