Agency Costs of Equity
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Questions and Answers

What does the Pecking Order Theory propose regarding capital structure?

  • Firms should always select the cheapest financing available. (correct)
  • Firms should prioritize debt over equity financing.
  • Firms should maximize their equity financing.
  • Firms should aim for an optimal capital structure.

    • What causes adverse selection costs in firms?

  • Debt financing
  • Information symmetry
  • Optimal capital structure
  • Information asymmetry (correct)

    • In the context of information asymmetry, what does 'one party to a transaction knowing more' refer to?

  • Only the seller knowing more than the buyer (correct)
  • Neither party having complete information
  • Both parties having equal information
  • The buyer knowing more than the seller

    • How can the seller take advantage of information asymmetry in a transaction?

    <p>By exploiting the buyer's lack of complete information</p> Signup and view all the answers

    What risk arises when a seller misrepresents the true quality of the item being sold?

    <p>Adverse selection by buyers</p> Signup and view all the answers

    Which concept is closely related to adverse selection costs in transactions?

    <p>Moral hazard</p> Signup and view all the answers

    How does information asymmetry impact pricing in transactions?

    <p>It leads to higher prices for buyers</p> Signup and view all the answers

    What is one way for buyers to counteract adverse selection due to information asymmetry?

    <p>Demanding full transparency from sellers</p> Signup and view all the answers

    'Pecking Order Theory' primarily focuses on:

    <p>'Minimizing financing costs'</p> Signup and view all the answers

    What is a key factor contributing to adverse selection costs according to the text?

    <p>Information asymmetry</p> Signup and view all the answers

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