The concept of adverse selection helps to explain all of the following except
A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets.
B) why indirect finance is more important than direct finance as a source of business finance.
C) why direct finance is more important than indirect finance as a source of business finance.
D) why the financial system is so heavily regulated.

Question

Quizplus · Accepted Answer

Adverse selection is the tendency for the riskiest borrowers to be the ones most likely to seek out loans or funding, which can make it difficult for lenders or investors to determine the true risk of an investment or loan. This can lead to higher interest rates or reluctance to lend. Adverse selection does not explain why direct finance is more important than indirect finance, as this is influenced by a range of factors including regulatory frameworks, market structure, and investor preferences.

The Concept of Adverse Selection Helps to Explain All of the Following