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Security design with interim public information

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  • Stenzel, André

Abstract

We consider a security design problem where public information about the security’s underlying cash-flow arrives between trading periods. The optimal security minimizes less-than-full realization of gains from trade due to limited cash in the market, which may depend on the interim information. We show that the optimal security can be expressed as a convex combination of securities solving minimization problems for which the solutions share many debt-like features but exhibit endogenous tranching. We provide conditions for the non-optimality of standard debt contracts and show that implementation of the class of optimal securities can be achieved by mezzanine tranche retention, providing a public information rationale for departure from the pecking order.

Suggested Citation

  • Stenzel, André, 2018. "Security design with interim public information," Journal of Mathematical Economics, Elsevier, vol. 76(C), pages 113-130.
    • Handle: RePEc:eee:mateco:v:76:y:2018:i:c:p:113-130
    DOI: 10.1016/j.jmateco.2018.02.005
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    Cited by:

    1. Stenzel, A. & Wagner, W.B., 2013. "Asset Opacity and Liquidity," Other publications TiSEM 36533529-29b8-4e85-9abd-0, Tilburg University, School of Economics and Management.
    2. Nedra Baklouti & Younes Boujelbene, 2018. "Moderation of the Relationship Between Size of Government and Corruption by Democracy," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 9(4), pages 1210-1223, December.
    3. André Stenzel & Wolf Wagner, 2022. "Opacity, liquidity and disclosure requirements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(5-6), pages 658-689, May.
    4. Gui, Zhengqing & von Thadden, Ernst-Ludwig & Zhao, Xiaojian, 2019. "Incentive-compatibility, limited liability and costly liquidation in financial contracting," Games and Economic Behavior, Elsevier, vol. 118(C), pages 412-433.

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