A key finding of the economic analysis of financial structure is that
A)the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses.
B)while free-rider problems limit the extent to which securities markets finance some business activities,nevertheless the majority of funds going to businesses are channeled through securities markets.
C)given the great extent to which securities markets are regulated,free-rider problems are not of significant economic consequence in these markets.
D)economists do not have a very good explanation for why securities markets are so heavily regulated.

Question

Quizplus · Accepted Answer

The free-rider problem in traded securities makes it difficult for investors to profit from gathering costly information about companies, leading to underinvestment in information gathering. Banks, by contrast, can avoid this problem by directly monitoring borrowers and keeping information proprietary, thus playing a predominant role in financing business activities.

A Key Finding of the Economic Analysis of Financial Structure