Informational asymmetries also occur in equity markets; the owners and managers of firms which issue equity on stock markets have more information about the future financial prospects of their firm than do the investors who buy equity on the stock markets. Asymmetric information offers opportunities for the owners and managers of financial institutions to exploit their informational advantage at the expense of their depositors.
High leverage exacerbates the incentives on financial institutions to exploit informational asymmetries, because in highly leveraged financial institutions the upside rewards of high risk investment strategies accrue to the owners of these institutions, whereas the downside risk is borne by their creditors.