Moral hazard arises in a lending context because

banks sometimes lend without regard to the borrower's ability to repay the loan.

the bank loses control of funds that it advances to the borrowing enterprise.

banks believe that they will not have to carry the full burden of potential losses.

The bank is justifiably worried that the borrower will

misspend the funds and not repay the loan and interest.

become severely ill and not repay the loan and interest.

refuse to agree to its terms and conditions.

This skepticism causes banks to be reluctant in lending and

to charge lower interest rates to attract more trustworthy customers.

to charge different customers different interest rates depending on their credit history.

to charge high interest rates to cover potential losses.

Accounting information can be valuable in alleviating this moral hazard by

allowing the bank to monitor the performance of the borrower

allowing the borrower to improve their performance

allowing the bank to advise the borrower how to improve its performance

using the accounting reports (for example, is the company profitable, how much assets does it have, how much cash flow is it generating?). Part of the monitoring is in the form of covenants that require the company to

change

comply with

disregard

various financial ratios computed using accounting reports. By alleviating the extent of moral hazard, accounting information allow banks to be

100% confident in borrowers

still skeptical of borrowers

less skeptical of borrowers

and thereby lower the interest rates that they charge and increase their lending activity.

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When a bank lends money to a company, moral hazard arises. Describe the detrimental effects of moral hazard in this context, and explain how accounting information can be valuable in alleviating this moral hazard. Moral hazard arises in a lending context because justifiably worried that the borrower will in lending and The bank is This skepticism causes banks to be reluctant Accounting information can be valuable in alleviating this moral hazard by V using the accounting reports (for example, is the company profitable, how much assets does it have, how much cash flow is it generating?). Part of the monitoring is in the form of covenants that require the company to various financial ratios computed using accounting reports. By alleviating the extent of moral hazard, accounting information allow banks to be and thereby lower the interest rates that they charge and increase their lending activity