Question

A high level of information asymmetry between insiders and outsiders encourages a greater use of debt relative to equity, as well as a greater reliance on short- term debt than on long- term debt in the capital structure. This statement is __________.

Answer 1

Answer: True

Explanation:

Information asymmetry has to do with the study of decisions taken in transactions where one party has better or more information than the other party. These differences in information or asymmetry leads to a power imbalance in transactions, which can lead to transactions going awry.

When high level of information asymmetry exists between the insiders and outsiders in a business environment, it encourages higher use of debt relative to equity, and more reliance on short- term debt rather than on long- term debt.