Banks are better at solving the stockholder-lender conflict than rating agencies when they
A) are allowed to hold a substantial ownership stake in the borrowing firm.
B) steer clear of holding any ownership stake in the borrowing firm.
C) operate in markets-oriented financial systems.
D) issue individually-approved loans rather than lines of credit.

Question

Quizplus · Accepted Answer

Banks that hold a substantial ownership stake in the borrowing firm have more of a vested interest in ensuring the firm's long-term success and profitability. This incentivizes banks to support decisions that benefit both themselves and the firm's other shareholders, rather than prioritizing the interests of creditors (lenders) over stockholders. This is a more effective way of solving the stockholder-lender conflict than relying on rating agencies, which typically do not have any stake in the borrowing firm and are solely focused on assessing creditworthiness.

Banks Are Better at Solving the Stockholder-Lender Conflict Than Rating