Ndikimi i informacionit asimetrik në tregjet financiare

The Impact of Asymmetric Information in Financial Markets

Fadil Govori

MPRA Paper from University Library of Munich, Germany

Abstract: Asymmetric information is a relevant concept for studying and understanding financial markets. In this paper we discus the effect of asymmetric information on the borrower–lender relationship. The presence of asymmetric information in financial markets leads to adverse selection, moral hazard, and monitoring costs. Adverse selection occurs when a lender is not capable of distinguishing between projects with different credit risk when allocating credit. Or, given the two projects with equal expected returns, the lender will prefer the safest one and the borrower the riskiest. Adverse selection occurs always at the phase of decision making process on credit allocation, that is, before the lender disburses the loan. It is understood that borrowers that undertake risky activities find it convenient to hide the true nature of a project, thereby exploiting the lender’s lack of information. When credit is allocated, there is another risk known as moral hazard. Moral hazard occurs when borrower apply the funds to different uses than those agreed upon with the lender, who is one more time hindered by his lack of information and control over the borrower. As it is understood, moral hazard takes place after having conceded the capital. Finally, monitoring costs are tied to a hidden action by borrower, who takes advantage of his better information do declare lower than actual earnings.

Keywords: Asymmetric information; adverse selection; monitoring costs; agency problem; financial markets (search for similar items in EconPapers)
JEL-codes: D82 E44 G14 G2 G3 (search for similar items in EconPapers)
Date: 2011-05-25
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/33831/1/MPRA_paper_33831.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:33831

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().