The authors' analysis of adverse selection indicates that financial intermediaries in general,and banks in particular (because they hold a large fraction of nontraded loans),
A) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than direct finance.
B) play a greater role in moving funds to corporations than do securities markets as a result of their ability to overcome the free-rider problem.
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) all of the above.
E) only A and B of the above.

Question

Quizplus · Accepted Answer

The authors' analysis suggests that financial intermediaries, especially banks, are better at overcoming adverse selection and the free-rider problem, allowing them to play a more significant role in moving funds to corporations compared to securities markets. This advantage of financial intermediaries helps explain why indirect finance is a more important source of business finance than direct finance. However, the authors do not provide evidence to support the idea that banks provide a higher percentage of external funds to larger and better-known corporations compared to smaller and newer corporations, or that newer and smaller corporations rely more on the new issues market for funds. Therefore, option C is incorrect.

The Authors' Analysis of Adverse Selection Indicates That Financial Intermediaries