Why Government Bonds Are Sold by Auction and Corporate Bonds by Posted-Price Selling
AbstractWhen information is costly, a seller may wish to prevent prospective buyers from acquiring information, for the cost of information acquisition is ultimately borne by the seller. A seller can achieve the desired prevention of information acquisition through posted-price selling, by offering prospective buyers a discount that is such as to deter them from gathering information. No such prevention is possible in the case of an auction. Clearly, a discount is costly to the seller. We establish the result that the seller prefers posted-price selling when the cost of information acquisition is high, and auctions when it is low. We view corporate bonds as an instance of the former case, and government bonds as an instance of the latter.
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Bibliographic InfoPaper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp78.
Date of creation: Mar 2003
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Government Bonds; Corporate Bonds; Auctions; Posted-Price Selling; Costly Information;
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
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- Ravi Jagannathan & Ann E. Sherman, 2006. "Why Do IPO Auctions Fail?," NBER Working Papers 12151, National Bureau of Economic Research, Inc.
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