Security Design with Investor Private Information
52 Pages Posted: 9 May 2002 Last revised: 11 Sep 2012
Date Written: January 3, 2007
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.
Note: Previously titled "Security Design in the Auctioning of Financial Assets"
Keywords: Security Design, Capital Structure
JEL Classification: D44, D82, G32
Suggested Citation: Suggested Citation
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