Which of the following statements is incorrect? A) Countries with stronger legal systems and a greater presence of analysts and auditors will have lower financial leverage ratios. B) Countries with stronger legal systems and a greater presence of analysts and auditors tend to increase agency costs. C) With a stripped MBS security, interest and principal payments generated by the underlying assets are allocated to the bondholders unequally.
I would say C
I would go for “B” “A” is correct because there is no need to increase interest expense to “watch over” management’s discretion over cash flow. “C” is correct because PO and IO are paid differently to security holders depending on the movement of interest rates.
B is incorrect (in my opinion). I mean i would for B as answer.
I was debating between B and C. The reason I did not choose B was that with greater legal systems, you will need to issue proper audited statements, will have to employ internal auditors and other committees. Wont all of this increase the agency cost? I dont know about C, so cant really be sure about it.
Idreesz, Agency cost is to do with pricing the risk coming from Agency Problem. Agency problem is non-alignment of interests of management and shareholders. With better corp governace and internal controls enforced in thru better legal regulations, Agency Costs will reduce.
Got your point. Thanks
Yeah, correct answer is B.