Game Analysis of the Influences of Converse Selection on Enterprise Financing

Jingting Ma, Shumei Wang, Jian Gui
2009 Asian Social Science  
Converse selection is the phenomenon commonly existing in the market, and its connotation is the asymmetry of information. Converse selection influences the trading between two or among above two different individuals or enterprises. Enterprise financing comes down to the trading between at least two different enterprises such as the financing party and the loan party, i.e. the behavior of converse selection influences the enterprise financing, and under different financing modes, these
more » ... odes, these influences are different, which can be better opened out by the game analysis. And the theory of signal can be used to reduce or eliminate the bad influences on the enterprise financing brought by the behavior of converse selection. Converse selection and information asymmetry The economic explanation of information asymmetry is that one party of the trading knows insufficiently about the other party, and both parties are in the unequal state. Generally speaking, seller possesses more information about the trading goods, for example, for the business of second-hand cars, seller more know the car, but the contrary situation may also exist, for example, for the medical insurance, the buyer generally possesses more information. According to the time sequence of asymmetric information, and information asymmetry is represented by converse selection and moral risk. The converse selection is the information asymmetry beforehand, and it means that the products with bad quality produced because of information asymmetry and descending market price drive out the products with good quality, and accordingly the phenomena that the average quality of products in the market falls occur. In the financial market, the converse selection means that the financing parties with the most possible disadvantageous (converse) result (i.e. the risk of breach faith) always are those people who seek the capitals most actively and acquire the capitals most possibly. Modes of enterprise financing The modes of enterprise financing can be divided into two sorts, i.e. the interior financing and the exterior financing.
doi:10.5539/ass.v6n1p174 fatcat:f6jn6ll2szcsbbqe65rs6o4hvi