Question

Deviations from informational efficiency would result in a large cost that will be borne by all participants, namely inefficient resource allocation. Corporations with overpriced securities, for example, would be able to obtain capital too expensively while undervalued companies might forgo investment opportunities because the cost of raising capital would be too low.
a. True
b. False

Answer 1

Answer: False

Explanation:

Deviations from informational efficiency does in fact result in a large cost for all participants however the effects given in the question are false.

If there is a deviation from informational efficiency, overpriced companies would be viewed as performing well enough to get capital at a cheaper rate because they would be viewed as less of a risk.

Undervalued companies would get capital at a higher cost because they would be viewed as less likely to pay back the capital when in fact they are not valued at their proper value which would have shown that they would be able to pay off the capital acquired.