Private Information and the Design of Securities
AbstractOne 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 InfoPaper provided by DELTA (Ecole normale supérieure) in its series DELTA Working Papers with number 92-22.
Length: 38 pages
Date of creation: 1992
Date of revision:
Publication status: Published in Journal of Economic Theory, 1995, 65, pp. 233-257
financial market ; risk ; information;
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