Final answer:
Accounting information ensures financial accountability, which reduces agency problems between management and debt holders by keeping both parties informed. Some ways a loan seeker could reassure a bank include providing detailed financial records, offering collateral, and demonstrating a reliable income or credit history.
Step-by-step explanation:
Accounting information reduces agency problems in relationships between management and debt holders by ensuring financial accountability. This keeps both parties informed about the company’s financial performance and reduces the risk of managers acting in their self-interest to the detriment of debt holders. Some ways that someone looking for a loan might reassure a bank include:
- Providing comprehensive financial records that clearly show past and current financial behavior.
- Offering collateral as a form of security against the loan.
- Showing a stable and sufficient income to cover loan repayments.
- Having a good credit history to demonstrate reliability in repaying debts.
- Proposing a detailed business plan that highlights the viability and future profitability of a business venture (for business loans).
These methods demonstrate to the lender that the borrower is committed to repaying the loan and reduce the information asymmetry that can lead to agency problems.