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Security Design with Investor Private Information

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  • ULF AXELSON
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    Abstract

    I study the security design problem of a firm when "investors" rather than managers have private information about the firm. I find that it is often optimal to issue information-sensitive securities such as equity. The "folklore proposition of debt" from traditional signaling models only goes through if the firm can vary the face value of debt with investor demand. When the firm has several assets, debt backed by a pool of assets is optimal when the degree of competition among investors is low, while equity backed by individual assets is optimal when competition is high. Copyright 2007 by The American Finance Association.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2007.01287.x
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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 62 (2007)
    Issue (Month): 6 (December)
    Pages: 2587-2632

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    Handle: RePEc:bla:jfinan:v:62:y:2007:i:6:p:2587-2632

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    Cited by:
    1. Hartman-Glaser, Barney & Piskorski, Tomasz & Tchistyi, Alexei, 2012. "Optimal securitization with moral hazard," Journal of Financial Economics, Elsevier, vol. 104(1), pages 186-202.
    2. Kobayashi, Mami & Osano, Hiroshi, 2012. "Nonrecourse financing and securitization," Journal of Financial Intermediation, Elsevier, vol. 21(4), pages 659-693.
    3. Kobayashi, Mami & Osano, Hiroshi, 2011. "The new main bank system," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 336-354, September.
    4. Jiang, Li & Kim, Jeong-Bon & Pang, Lei, 2011. "Control-ownership wedge and investment sensitivity to stock price," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2856-2867, November.
    5. Malamud, Semyon & Rui, Huaxia & Whinston, Andrew, 2013. "Optimal incentives and securitization of defaultable assets," Journal of Financial Economics, Elsevier, vol. 107(1), pages 111-135.
    6. Ulf Axelson & Tim Jenkinson & Per Strömberg & Michael S. Weisbach, 2008. "Leverage and Pricing in Buyouts: An Empirical Analysis," OFRC Working Papers Series 2008fe20, Oxford Financial Research Centre.
    7. Chemla, Gilles & Hennessy, Chris, 2011. "Security Design: Signaling Versus Speculative Markets," Economics Papers from University Paris Dauphine 123456789/6311, Paris Dauphine University.
    8. Chemla, Gilles & Hennessy, Christopher, 2011. "Security Design: Signaling versus Speculative Markets," CEPR Discussion Papers 8336, C.E.P.R. Discussion Papers.

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