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Private Information and the Design of Securities

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  • Demange, G.
  • Laroque, G.

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 DELTA (Ecole normale supérieure) in its series DELTA Working Papers with number 92-22.

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Length: 38 pages
Date of creation: 1992
Date of revision:
Publication status: Published in Journal of Economic Theory, 1995, 65, pp. 233-257
Handle: RePEc:del:abcdef:92-22

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Keywords: financial market ; risk ; information;

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Cited by:
  1. 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.
  2. García, Diego & Urošević, Branko, 2013. "Noise and aggregation of information in large markets," Journal of Financial Markets, Elsevier, vol. 16(3), pages 526-549.
  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. Enrique L. Kawamura, 2000. "Investor´s Distrust and the Marketing of New Financial Assets," Working Papers 23, Universidad de San Andres, Departamento de Economia, revised Apr 2004.
  5. Chiaki Hara & Atsushi Kajii, 2003. "On the Range of the Risk-Free Interest Rate in Incomplete Markets," KIER Working Papers 577, Kyoto University, Institute of Economic Research.
  6. Han N. Ozsoylev, 2005. "Amplification and Asymmetry in Crashes and Frenzies," Economics Series Working Papers 2005-FE-11, University of Oxford, Department of Economics.
  7. Luis Angel Medrano & Xavier Vives, 2004. "Regulating Insider Trading When Investment Matters," Review of Finance, Springer, vol. 8(2), pages 199-277.
  8. 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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