Answer 1. When company wants to raise the funds through capital market then there are some securities which are prone to adverse selection. In case of equity shares it happens, when managers have some inside information about the company's share price then outsiders are more prone to such type of risk. It can happen because managers may offer to sell the shares when they know the offer price exceeds their private assessments of the company's value. Investors will be at disadvantage because they will enter into an equity contract without knowing that the company is overvalued.

The most important tool to solve  adverse selection is to bridge the perceived information gap between the two parties ,allow them to know as much as possible. In capital market, every effort should be made to eliminate asymmetric information and by provide relevant information about the borrowers (company) to the investors.

Answers 2. Moral hazard in equity contracts can be explained with the agency cost. Relationship between shareholders and managers is that of principle and agent respectively. Managers think that they work very hard for the maximization of company's wealth but get only fraction of share from profits as a salary. Even they don't enjoy voting power. While shareholders think that managers don't work properly or in the interest of company and geeting huge amount of salaries for doing nothing. If company suffers losses then shareholders will suffer the ultimate losses. This is the moral hazard and it is the biggest issue in equity contracts.

Problem of moral hazard can be solved by effective management information system. By ensuring proper accounting and auditing in the company , shareholders can keep a close eye on the company's financial activities.