Evaluating and Explanation of Moral Hazards and Adverse Selection in Capital Market and the Role of Ethics in their Reduction

This research has been done to study and clarify the moral hazards and adverse selection in the capital market and the role of ethics in its reduction. It has methodically worked on the qualitative and interpretative structures and has tried to figure the case descriptively and analytically out according to the qualitative method, using library and internet resources. To create transparency in a capital market, information availability is the most important factor. The clearer the capital market information (symmetric information) is, the more effective will be this market on the economic growth and development. One of the results of information asymmetry is the abuse of the party with more information or, in other words, their moral hazard, in the consequence of which the other party with less information will make an adverse selection. Therefore, compiling rules and ethics charters based on moralities which go with religious and national culture, can reduce the monitoring cost and guarantee the rules execution. These will lead to create trust and honesty in the market and enhance transparency in the capital market.