| Information plays an important role in market structure and market function. But it is not free to acquire information, so people can hardly know all of economic information completely in reality. It is impossible that there is a market having complete information. The participants can't have all useful information at the same time because of incomplete information in a market, which shows information asymmetry and market uncertainty.Capital market which have the borrower and the accommodator is a typically market of information asymmetry. The borrower who is the user of the capital knows much more than the accommodator about the item of investment, income and risk from investment and the possibility of paying back. The accommodator is only the provider of the capital and can't use it directly. Thus, in respect of having relevance information, the borrower is superior to the accommodator. In essence, the relationship between them is to play a game by contract or other economic restrain like agent and client. As a result, the person who knows more information hides the fact. It is called counter selection when there is a behavior of concealing information before signing a contract and called moral risk after signing a contract.As far as credit market is concerned, the borrower and the accommodator play a game because of information asymmetry. The firms that have good credit can no longer apply for loans when the rate rises, but those having bad credit or fond of risk investment will continue to apply for loans. The less possibility of paying back will result in the decrease of the bank's income. In course of a game between the bank and the firm, the bank takes measures of quantity constraint ─ that is credit rationing rather than raising rate to restrict firms.The capital environment of running a company is of utmost importance to the formation of a company's developing strategy and competitive edge. Compared with big firms, the phenomena of information asymmetry in financing are serious to small & medium firms because of imperfect administrative structure, financial information unclear to the public and absence of credit accumulation. Small & medium firms play very important roles in course of economy development in China. But their financing status cannot match with it. The remarkable character of small & medium firms in our country is too dependent on internal accumulated capital. According to the research of international finance company subordinate to the World Bank, the developing capital of non-stated companies in our country mostly come from the owner's capital and internal income reserved, above 50-60% in recent years, while direct financing from bonds and shares is less than 1%, and about 20% from bank loans. But in America, the capital comes from the owner about 30%, shares about 18% and loans from finance institutions about 42%. This reflects that the current finance system in our country that the commercial bank stands a dominant position is ineffective. How to overcome the difficulties of small & medium firms financing is an important theoretical and practical problem. This paper is divided into four chapters. The first chapter introduces efficient market hypothesis and analyzes the reasons and manifestation of incomplete capital market. In the second chapter we analyze that owing to information asymmetry in the capital market, both sides of transaction play a game without corporation result in unreasoning investment. In the third chapter we explain the reasons of credit rationing and conduction channels through specific models and interpret why small & medium firms encounter credit rationing in course of financing. In the fourth chapter we put forward some reasonable and valuable countermeasures and suggestions by analyzing the case and combining the model above-mentioned.In order to solve the problem of small & medium firms financing, we need joint efforts from the company, governments at different levels, financial departments and whole society. So we pu...
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