Question

Question 8 40 pts One of the main goals in the capital markets is the "effective capital allocation". Please discuss the following items. 1. How does information asymmetry destroy the capital market? Please provide an example in the stock market 2. What roles can you play to help the effective capital allocations in stock or bond market as accounting professionals?. You should use the article of" the market for lemon" to discuss this issue. HTML EditorKeyboard Shortcuts 12pt Paragraph 0 words

Answer 1

1. Information asymmetry is one party has more knowledge of the stock markets than the other party. Usually the managers of the capital markets have access to information that influences stock than the investors in the capital market. There is information misbalance which may distort capital market transactions. For example, a stock exchange broker has a friend who works in the finance department of a publicly traded company may access to the company's financial results before they are announced to the public. He may anticipate the stock price to go up and hence buy more stocks today at lower price which creates more demand and artificially increase the price.

2. To answer this question please post the article.

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