Figure 1 in Chapter 8 broke down the sources of external financing for non-financial businesses in the U.S. as follows:
Non-bank loans 38%
Bank loans 18%
Bonds 32%
Stocks 11%
Explain why the young founders of Google, Amazon, Facebook, Uber, Airbnb, Netflix turned to venture capital (a non-bank financial intermediary) before they turned to banks for loans or do an IPO to become a public corporation so they can access financing from the bond and stock markets. What does the textbook say about how venture capital firms deal with the free-rider problem? the moral hazard problem?
Use the concepts of adverse selection (lemons problem) and moral hazard (principal-agent problem) faced by banks and stock market investors and explanations for facts # 1, 2, 5, 6, 7, and 8 (refer to PPT slides and/or textbook).