Questions and Answers
What does the Pecking Order Theory suggest regarding firms' capital structure?
Firms should always select the financing option with the lowest cost.
What are adverse selection costs primarily caused by in the context of financing?
Information asymmetry
What does information asymmetry refer to in the context of the Pecking Order Theory?
A situation where only the seller has more information than the buyer
How can a seller potentially take advantage in a situation of information asymmetry?
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What could be a consequence if a seller is willing to accept a low price for high-quality items?
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In the context of financing, what might happen if a firm aims for an optimal capital structure ignoring costs?
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How can adverse selection impact firms' financing decisions according to the Pecking Order Theory?
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What is one potential consequence of information asymmetry in a market transaction?
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