ECN 315 Exam 2

Large, well-established corporations

have easy access to securities markets to finance their activities

Collateral

is a prevalent feature of debt contracts for both households and businesses.

The financial system

is among the most heavily regulated sectors of the economy

Indirect finance

is many times more important than direct finance

Issuing marketable debt and equity securities

is not primary way in which businesses finance their operations

Asymmetrical Information

one party in a transaction has more or superior information compared to another

Economies of Scale

the cost advantages that an enterprise obtains due to expansion

Financial Repression

A system in which states extract savings from one sector, by not paying market prices for the goods produced by that sector and putting that money into other failing sectors

Separation of ownership and control of the firm

Managers pursue personal benefits and power rather than the profitability of the firm

Principal-Agent Problem

a problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him

Debt contracts

are extremely complicated legal documents that place substantial restrictive covenants on borrowers

Financial intermediaries, Banks

are most important source of external funds used to finance businesses.

Stocks

are not the most important sources of external financing for businesses

Moral hazard

asymmetrical information that occurs after the transaction

Adverse selection

asymmetrical information that occurs before the transaction