Chapter 7 Flashcards
Agency theory
The analysis of how asymmetric
information problems affect economic
behavior.
Audits
Certification by accounting firms that a
business is adhering to standard accounting
principles
Collateral
Property that is pledged to the lender
to guarantee payment in the event that the
borrower should be unable to make debt
payments
Conflicts of interest
A manifestation of moral hazard
in which one party in a financial contract has
incentives to act in its own interest, rather than
in the interests of the other party
Costly state verification
Monitoring a firm’s activities, an expensive process in both time and
money
Economies of scope
Increased business that can be
achieved by offering many products in one easy to-reach location
Equity capital
net worth
Free rider problem
The problem that occurs when
people who do not pay for information take
advantage of the information that other people
have paid for.
Incentive compatible
Aligning the incentives of both
parties to a contract.
IPOs
A corporation’s first sale of
securities to the public.
Net Worth
The difference between a firm’s assets
(what it owns or is owed) and its liabilities
(what it owes). (Also called equity capital.)
Pecking order hypothesis
The hypothesis that the
larger and more established is a corporation, the
more likely it will be to issue securities to raise
funds.
Principal agent problem
A moral hazard problem
that occurs when the managers in control (the
agents) act in their own interest rather than in
the interest of the owners (the principals) due to
differing sets of incentives.
Restrictive covenants
Provisions that specify certain
activities that a borrower can and cannot engage
in.
Secured debt
Debt guaranteed by collateral.
