Stockholders of ComfortAir Corporation,an air conditioner and furnace manufacturer,are concerned that the companies executives may take on greater risks than stockholders desire.This example illustrates
A)moral hazard and market risk.
B)moral hazard and firm specific risk.
C)adverse selection and market risk.
D)adverse selection and firm specific risk.

Question

Quizplus · Accepted Answer

Moral hazard refers to the situation where one party, typically an agent, has an incentive to take on greater risks than another party, typically a principal, desires. In this case, the executives of ComfortAir Corporation may be motivated to take on excessive risks in order to maximize their own benefits, while the stockholders would prefer a more conservative approach. Firm-specific risk refers to risks that affect a particular company, such as operational or financial risks. This is relevant in this case since the stockholders are concerned about the actions of their own company's executives, rather than risks that affect the market as a whole. Therefore, the correct answer is B) moral hazard and firm-specific risk.

Stockholders of ComfortAir Corporation,an Air Conditioner and Furnace Manufacturer,are Concerned