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Private Information and the Design of Securities

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Author Info

  • Demange Gabrielle
  • Laroque Guy

Abstract

One often quoted reason for the incompleteness of financial markets is the fact that an informational asymmetry prevents entrepreneurs to float their company on the market. In fact, the privileged information that the owners have on their firms discourages rational financial investors and thins the market. The paper studies the validity of this argument in a model similar to Grossman-Stiglitz (1980). An entrepreneur who contemplates issuing a new security faces a trade-off between speculative gains, which arise from his privileged information, and an insurance motive, associated with the insurance provided by the stock market. We study the terms of this arbitrage as a function of the fundamentals of the economy: aggregate risk, risk tolerance, precision of the privileged information.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 65 (1995)
Issue (Month): 1 (February)
Pages: 233-257

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Handle: RePEc:eee:jetheo:v:65:y:1995:i:1:p:233-257

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Web page: http://www.elsevier.com/locate/inca/622869

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Cited by:
  1. Kawamura, Enrique, 2004. "Investors's distrust and the marketing of new financial assets," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(2), pages 265-295, May.
  2. Kajii, A. & Hara, C., 2000. "On the Range of the Risk-Free Interest Rate in Incomplete Markets," Cambridge Working Papers in Economics 0030, Faculty of Economics, University of Cambridge.
  3. Han Ozsoylev, 2008. "Amplification and asymmetry in crashes and frenzies," Annals of Finance, Springer, vol. 4(2), pages 157-181, March.
  4. Faias, Marta, 2004. "General equilibrium and endogenous creation of asset markets," FEUNL Working Paper Series wp454, Universidade Nova de Lisboa, Faculdade de Economia.
  5. Shiller, Robert J., 1999. "Social security and institutions for intergenerational, intragenerational, and international risk-sharing," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 165-204, June.
  6. García, Diego & Urošević, Branko, 2013. "Noise and aggregation of information in large markets," Journal of Financial Markets, Elsevier, vol. 16(3), pages 526-549.
  7. Diego García & Branko Urosevic, 2004. "Noise and aggregation of information in large markets," Economics Working Papers 785, Department of Economics and Business, Universitat Pompeu Fabra.

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