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What is Asymmetric Information on the Financial Market

Chapter 2
Handbook of Research on Corporate Restructuring and Globalization
Consists in the fact that primary savers and primary borrowers have incomplete information about each other, the level of information being uneven between the contracting parties. If the problem resulting from asymmetric information occurs before the financial transaction we have an adverse selection problem – it occurs when insufficient information about potential borrowers leads to a poor selection of projects for which funding is requested. If the problem resulting from asymmetric information occurs after financial transformation we have a problem of moral hazard – it consists of the risk propensity of the agent contracting a loan to change the initial destination of the funds after the loan is granted. There is also another type of problem associated with asymmetric information, the problem of the principal agent or agency theory.
Published in Chapter:
The Restructuring of the Financial System in the 21st century
Elisabeth T. Pereira (University of Aveiro, Portugal)
Copyright: © 2019 |Pages: 22
DOI: 10.4018/978-1-5225-8906-8.ch002
Abstract
The financial system on the first decades of the 21st century followed the trend of the last decades of the 20th century with corporate restructuring and international financial markets integration and delocalization being oriented by profits and mergers and acquisitions. The global economy and financial structure changes, in the current century, derived from financial innovations, market deregulation, globalization, technology, market structure changes, regulatory reforms, and (re)formulation of central banks' monetary policy. Currently, the financial system is interconnected, interactive, interdependent, and became over-leveraged. The present chapter focuses on the analysis of the evolution of the financial system and the main determinants of global financial markets restructuring on last decades to explain the relevant changes verified in the financial system in the 21st century. After a literature review, an evaluative and descriptive macro analysis of the financial system is presented to study the process of restructuring of the financial system in the main developed economies.
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