When a firm issues bonds instead of stocks it is lessening the problem of because bonds .

Question

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Issuing bonds instead of stocks helps lessen the problem of adverse selection because bonds require the firm to pay a given amount as long as they do not default. This reduces the risk to investors of potential losses due to the firm's failure to generate expected profits, which in turn reduces the likelihood of adverse selection.

When a Firm Issues Bonds Instead of Stocks It Is