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Design and Marketing of Financial Products

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  • Madan, Dilip
  • Soubra, Badih

Abstract

Marketing costs are introduced into the security design environment outlined in Allen and Gale (1988). It is shown that splitting the firm's cash flow between products enhances their investor appeal and reduces marketing costs. We also explain how the extremal product design in Allen and Gale is thereby avoided and how in simple cases, debt, equity, or warrants can be optimal. Furthermore, we illustrate in general terms how the optimal solution employs portfolios of option-type products, and we give an example of two optimal products that share profits in seven of eight states. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Madan, Dilip & Soubra, Badih, 1991. "Design and Marketing of Financial Products," Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 361-384.
  • Handle: RePEc:oup:rfinst:v:4:y:1991:i:2:p:361-84
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    Citations

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    Cited by:

    1. Fulghieri, Paolo & Lukin, Dmitry, 2001. "Information production, dilution costs, and optimal security design," Journal of Financial Economics, Elsevier, vol. 61(1), pages 3-42, July.
    2. Schuhmacher, Joachim, 1998. "Seniority Structure and Financial Intermediation," Discussion Paper Serie A 583, University of Bonn, Germany.
    3. Bhagwan Chowdhry & Mark Grinblatt & David Levine, 2002. "Information Aggregation, Security Design, and Currency Swaps," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 609-633, June.
    4. Chowdhry, Bhagwan & Grinblatt, Mark, 1997. "Information Aggregation, Currency Swaps, and the Design of Derivative Securities," University of California at Los Angeles, Anderson Graduate School of Management qt0js61067, Anderson Graduate School of Management, UCLA.
    5. Viswanath, P. V. & Frierman, Mike, 1995. "Asset fungibility and equilibrium capital structures," Journal of Economics and Business, Elsevier, vol. 47(4), pages 319-334, October.
    6. Viral V. Acharya & Alberto Bisin, 2005. "Optimal Financial-Market Integration and Security Design," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2397-2434, November.
    7. Frank Milne & Edwin Neave, 2003. "A General Equilibrium Financial Asset Economy with Transaction Costs and Trading Constraints," Working Papers 1082, Queen's University, Department of Economics.
    8. Ronn, Ehud I. & Senbet, Lemma W., 1995. "Debt and market incompleteness," Journal of Banking & Finance, Elsevier, vol. 19(8), pages 1379-1400, November.
    9. Joel M. Vanden, 2016. "Optimal capital structures for private firms," Annals of Finance, Springer, vol. 12(2), pages 245-273, May.

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