Asymmetric information and benefits of financial derivatives

The purpose of this paper is to present the main trends regarding the assymetric information, using the available statistical data on OTC financial derivatives. Information failure occurs when people have inaccurate, incomplete or misunderstood data and so make potentially wrong choices. In modern financial economics; managerial adverse selection&moral hazard are widely accepted as impediments to effective contractual arrangements between the manager and investors, resulting in inefficiencies of overall corporate management. Financial derivatives amplify the consequences of asymmetric information through implicit leverage if a party to the contract fails to follow agreement. Use of derivatives and the extent of derivatives usage are associated with lower asymmetric information. The companies facing medium level of information asymmetry are more likely to hedge, while companies with very high and low levels of asymmetric information tend to speculate.