Analysis of adverse selection indicates that financial intermediaries,especially banks
A)have advantages in overcoming the free-rider problem,helping to explain why indirect finance is a more important source of business finance than is direct finance.
B)despite their success in overcoming free-rider problems,nevertheless play a minor role in moving funds to corporations.
C)provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds.
D)must buy securities from corporations to diversify the risk that results from holding non-tradable loans.

Question

Quizplus · Accepted Answer

Financial intermediaries, especially banks, have advantages in overcoming the free-rider problem, which is one reason why indirect finance is more important than direct finance for businesses. This is because intermediaries can pool resources and conduct in-depth analyses that individual investors might not undertake due to the costs involved, thus mitigating adverse selection issues.

Analysis of Adverse Selection Indicates That Financial Intermediaries,especially Banks