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Summary ECO316 WEEK3 assignment.docx Asymmetric Information ECO 316 Asymmetric Information Hubbard & O Brien (2017) define asymmetric information as œa situation in which one party to an economic transaction has more information than the other party. The$7.49
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Summary ECO316 WEEK3 assignment.docx Asymmetric Information ECO 316 Asymmetric Information Hubbard & O Brien (2017) define asymmetric information as œa situation in which one party to an economic transaction has more information than the other party. The
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ECO316 WEEK3 Asymmetric Information ECO 316 Asymmetric Information Hubbard & O Brien (2017) define asymmetric information as œa situation in which one party to an economic transaction has more information than the other party. The bond market, specifically corporate bonds, is a market t...
eco316 week3 assignmentdocx asymmetric information eco 316 asymmetric information hubbard amp o brien 2017 define asymmetric information as œa situation in which one party to an economic t
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Asymmetric Information
Asymmetric Information
ECO 316
, Asymmetric Information
Asymmetric Information
Hubbard & O’Brien (2017) define asymmetric information as “a situation in which one
party to an economic transaction has more information than the other party.” The bond
market, specifically corporate bonds, is a market that’s rife with asymmetric information. As
corporate bonds are essentially promissory notes from the corporations that issue them, they
are basically only as reliable as the company issuing them. When a company issues bonds it
does so with information that the investor may not know, such as trends in sales, potential
lawsuits, etc. This asymmetric information is just the nature of any business, if a company
operated with full disclosure about how poor sales are, or that they have no viable plan to
reverse course, institutional and private investors would be far more reticent to invest in that
company. If all information were disclosed, it could potentially lead to many firms going out of
business due to a lack of investment capital, so in my estimates these are key reasons why firms
withhold information from investors.
Adverse Selection
Klein, Lambertz, & Stahl (2016) describe adverse selection as “when exploitative and
careless buyers and sellers enter into the market and conscientious ones exit”.Adverse
selection is a problem investors face in differentiating low risk borrowers from high risk
borrowers prior to making an investment. Adverse selectionalso pertains to the bond market
because investors can have trouble differentiating between good firms that are likely to honor
the terms of the bond, and bad firms that are at higher risks of defaulting.
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