Question

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

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Answer #1

Because of the adverse selection problem in the financial market, the firm's newly issued stock or bond could be undervalued and that will force these companies to withdraw from the market and go private in nature so it will just leave the overvalued credit firms in the market.

Due to the problem of adverse selection due to lack of informations the securities are not adequately valued and if they are undervalued, the firm can withdraw the securities and that will only make overvalued credit firm exist in the market

Correct answer will be UNDERVALUED, OVERVALUED.

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