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Security Design with Investor Private Information

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    Abstract

    I study the security design problem of a firm when investors rather than managers have private information about the firm. I find that it is often optimal to issue information-sensitive securities like equity. The "folklore proposition of debt" from traditional signalling models only goes through if the firm can vary the face value of debt with investor demand. When the firm has several assets, debt backed by a pool of assets is optimal when the degree of competition among investors is low, while equity backed by individual assets can be optimal when competition is high.

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    Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number 37.

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    Length: 54 pages
    Date of creation: 15 Oct 2005
    Date of revision:
    Handle: RePEc:hhs:sifrwp:0037
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    Keywords: Security design; Capital Structure; Auctions; Asset backed securities;

    Find related papers by JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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    17. Francesca Cornelli, 2001. "Bookbuilding and Strategic Allocation," Journal of Finance, American Finance Association, vol. 56(6), pages 2337-2369, December.
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