In general corporations issue securities to finance

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Unformatted text preview: al, corporations issue securities to finance their investments in real assets and cover the gap between their investment plans and their internally generated savings such as retained earnings. As shown in Figure 1–1, in such a world savings would flow from households to corporations; in return, financial claims (equity and debt securities) would flow from corporations to household savers. In an economy without FIs, the level of fund flows between household savers and the corporate sectors is likely to be quite low. There are several reasons for this. Once they have lent money to a firm by buying its financial claims, households need to monitor or check the actions of that firm. They must be sure that the firm’s management neither absconds with nor wastes the funds on any projects with low or negative net present values. Such monitoring actions are extremely costly for any given household because they require considerable time and expense to collect sufficiently high-quality information relative to the size of the average household saver’s investments....
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This document was uploaded on 03/09/2014 for the course ACC 301 at HELP University.

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