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Illuminating the Dark Side of Financial Innovation: The Role of Investor Information

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  • Ammann, Manuel
  • Arnold, Marc
  • Straumann, Simon

Abstract

This paper investigates the impact of investor information on financial innovation. We identify specific channels through which issuers of financially engineered products exploit retail investors by using their privileged access to information. Our results imply that imperfect investor information regarding volatility and dividends is crucial to explain the pricing and design of financially engineered products. We confirm our conjecture by exploiting a discontinuity in issuers' informational advantage. The insights are of systemic importance because they suggest that product issuers' behavior in the financial innovation market aggravates investor information problems of the financial system.

Suggested Citation

  • Ammann, Manuel & Arnold, Marc & Straumann, Simon, 2017. "Illuminating the Dark Side of Financial Innovation: The Role of Investor Information," Working Papers on Finance 1704, University of St. Gallen, School of Finance.
    • Handle: RePEc:usg:sfwpfi:2017:04
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    File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1704.pdf
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    References listed on IDEAS

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    Cited by:

    1. Marc Arnold & Dustin Schuette & Alexander Wagner, 2021. "Neglected Risk in Financial Innovation: Evidence from Structured Product Counterparty Exposure," European Financial Management, European Financial Management Association, vol. 27(2), pages 287-325, March.

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    More about this item

    Keywords

    Structured Products; Investor Information; Financial Innovation;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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