Final answer:
The statement that a financial structure with more short-term financing is riskier is true. Short-term financing poses liquidity risks and can be susceptible to rapid outflows in response to negative economic news, potentially destabilizing an entity's financial condition.
Step-by-step explanation:
The question asks whether it is true or false that a financial structure with a higher proportion of short-term financing relative to long-term financing is riskier. The statement is true. Short-term financing carries a higher risk than long-term financing because it is subject to more immediate repayment demands and often needs to be refinanced under potentially unfavorable conditions, which can create liquidity problems for a company. This is compounded when short-term investments, such as government bonds, do not fund long-term physical capital but instead are expected to be paid back or rolled over in the near future. These conditions can lead to rapid outflows of capital in response to negative economic indicators or news that can undermine an entity's financial stability.
For instance, if a bank relies on short-term deposits for funding but lends for the long term, it will face a mismatch in asset-liability duration, which could lead to liquidity issues if the bank is unable to align its interest rates received from loans with the interest rates it has to pay to depositors.
Furthermore, high levels of short-term foreign investment could pose a risk to a country's economy, as a significant amount of this investment could quickly exit in response to negative news, impacting the exchange rate and economic stability – similar to an avalanche triggered by just a few falling rocks.