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Private information and the design of securities

Demange, G.; Laroque, G.; (1995) Private information and the design of securities. Journal of Economic Theory , 65 (1) pp. 233-257. 10.1006/jeth.1995.1009.

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The privileged information that the owners have on their firms may discourage rational financial investors and consequently may prevent the entrepreneurs from floating their company on the market. The paper studies the validity of this argument in a model similar to that of Grossman and Stiglitz [8]: an entrepreneur who contemplates issuing a new security faces a trade-off between speculative gains, which arise from his privileged information, and an insurance motive, associated with the insurance provided by the stock market. We make explicit how this trade-off depends on the fundamentals of the economy: aggregate risk, risk tolerance, precision of the privileged information.

Title:Private information and the design of securities
Publisher version:http://dx.doi.org/10.1006/jeth.1995.1009
UCL classification:UCL > School of Arts and Social Sciences > Faculty of Social and Historical Sciences > Economics

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