The company that manufactures Screaming Chocolate Zonkers breakfast cereal finds that its sales collapse, it is forced into bankruptcy, and it defaults on its bonds, as a result of information on the filthy conditions in its factory, which had long been known to management, leaking out to the general public. This incident is best thought of as an example of
A)symmetric information in the financial markets.
B)asymmetric information in the financial markets.
C)moral hazard in the financial markets.
D)the generally poor state of sanitation in the food-processing industry in the United States.

Question

Quizplus · Accepted Answer

This incident is an example of asymmetric information in the financial markets because the management had information about the unsanitary conditions in the factory, but the public did not. As a result, the public's perception of the company was different from the reality, and this asymmetric information led to the collapse of the company and its default on bonds.

The Company That Manufactures Screaming Chocolate Zonkers Breakfast Cereal Finds