The concept of adverse selection helps to explain all of the following EXCEPT
A)why firms are more likely to obtain funds from banks and other financial intermediaries,rather than from the securities markets.
B)why indirect finance is more important than direct finance as a source of business finance.
C)why direct finance is more important than indirect finance as a source of business finance.
D)why the financial system is so heavily regulated.

Question

Quizplus · Accepted Answer

Adverse selection implies that those who are most likely to default or have negative outcomes are the ones who are most likely to seek out and obtain financing. This means that direct finance, where lenders have more information about borrowers, is less susceptible to adverse selection than indirect finance, where the issuer of the security has less information about the ultimate borrower. Therefore, option C is incorrect, while options A, B, and D are all consistent with the concept of adverse selection.

The Concept of Adverse Selection Helps to Explain All of the Following