What term is used to describe the fact that managers know far more about the firm's prospects than do the finance providers?

Question

Quizplus · Accepted Answer

Information asymmetry refers to a situation where one party has more information than another in a transaction. In this case, managers have access to information about the firm's prospects that finance providers do not have, creating a situation of information asymmetry. Option A, insider dealing refers to the illegal practice of trading securities based on non-public information. Option B, information transference, is not a commonly used term and does not accurately describe the given situation. Option C, the agent problem, refers to a situation where agents (in this case, managers) may act in their own self-interest instead of in the best interest of the principal (in this case, finance providers), which can be a result of information asymmetry. However, it is not the most appropriate term for the given scenario.

What Term Is Used to Describe the Fact That Managers