Investment Finance & The Selection Problem - Equity Finance Flashcards
(2 cards)
1
Q
We have seen that due to selection problem, the use of credit to finance investment projects may lead to projects not being funded.This problem can be overcome by the use of equity finance instead of credit finance. How?
A
The intuition: since all projects have the same expected return, they will all be valued equally by shareholders
*Then, no problem of selecting between different projects
2
Q
Adverse Selection
A
When sellers have information that buyers do not. Or vice versa. In the equity finance case there is no adverse selection
