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Private Information and the Design of Securities

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Author Info

  • Gabrielle Demange
  • Guy Laroque

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

Paper provided by European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ in its series CEPR Financial Markets Paper with number 0036.

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Date of creation: Oct 1993
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Availability: in print
Handle: RePEc:cpr:ceprfm:0036

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Related research

Keywords: Insider Trading; Security Design;

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Cited by:
  1. 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.
  2. Robert J. Shiller, 1998. "Social Security and Institutions for Intergenerational, Intragenerational, and International Risk Sharing," JCPR Working Papers 43, Northwestern University/University of Chicago Joint Center for Poverty Research.
  3. 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.
  4. Han N. Ozsoylev, 2005. "Amplification and Asymmetry in Crashes and Frenzies," OFRC Working Papers Series 2005fe11, Oxford Financial Research Centre.
  5. García, Diego & Urošević, Branko, 2013. "Noise and aggregation of information in large markets," Journal of Financial Markets, Elsevier, vol. 16(3), pages 526-549.
  6. 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.
  7. Faias, Marta, 2004. "General equilibrium and endogenous creation of asset markets," FEUNL Working Paper Series wp454, Universidade Nova de Lisboa, Faculdade de Economia.

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