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Explanation and Implications of Information Asymmetry - Essay Example

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This writing "Explanation and Implications of Information Asymmetry" concerns the definition of Information Asymmetry, describing the explanation of information asymmetry and mplications of information asymmetry for company executives, investors and prospective investors…
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Explanation and Implications of Information Asymmetry
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"Explanation and Implications of Information Asymmetry"

The borrower tends to have much better information about their financial status than the lender, and the lender is difficulty in knowing if the borrower will ultimately default. This lack of perfect information often leads to moral hazards, adverse selection and market failure. Implications of information asymmetry for company executivesTo the company executives, information asymmetry leads to moral hazard. Since they have more information about the company than other stakeholders, they tend to take undue risks since the costs they incur often borne by parties that take the risk. For instance, they are more likely to the company’s resources in a bid to generate more revenues and get performance contingent compensation even if the investment is highly risky. Implications of information asymmetry for investorsTo the current investors, information asymmetry makes them incur losses on their investments. They have much less information regarding the performance of their investments and face difficulty in knowing when to sell and when to hold onto their shares.Implications of information asymmetry for prospective investorsFinally, information symmetry provides harmful situations to potential investors as brokers often take advantage of their lack of information. It results in adverse selection top them; they may be more inclined by brokers to invest in poor performing stocks thus suffering financial losses or even losing their entire investment. They end up selecting bad investments. Read More
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