Because of the adverse selection problem in the financial market, a firm’s newly issued stocks or...

Because of the adverse selection problem in the financial market, a firm’s newly issued stocks or bonds could be ( ) so that the firm would withdraw from the market. It will leave only the ( ) credit firms in the market.

Words:

Good, bad, undervalued, overvalued

Expert Solution

Because of the problem of the adverse selection in the financial market the newly issued stock or bond of a firm can be UNDERVALUED, because there would not be sufficient information on the part of the investor to completely value them correctly, so forym will be trying to withdraw those bonds or stocks out of the market and go private in nature, so it will lead only OVERVALUED credit firms are existing in the market. This can be attributed to the problem of information asymmetry in which the issuer of these stocks and bonds will be having higher knowledge than the subscriber of total security.

So, undervaluation of bonds and Stocks can lead to firm withdrawing from the market and it will be left out with only overvalued firms.

Correct answer will be UNDERVALUED, OVERVALUED.

jeff jeffy answered 2 years ago

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Because of the adverse selection problem in the financial market, a firm’s newly issued stocks or...

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