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Separating equilibria, underpricing and security design
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Bernhardt, Dan, Koufopoulos, Kostas and Trigilia, Giulio (2021) Separating equilibria, underpricing and security design. Journal of Financial Economics . doi:10.1016/j.jfineco.2021.08.021 (In Press)
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Official URL: https://doi.org/10.1016/j.jfineco.2021.08.021
Abstract
Classical security design papers equate competitive capital markets to securities being fairly priced in expectation. We revisit (Nachman and Noe, 1994)’s adverse selection setting, modeling capital market competition as free entry of investors and allowing firms to propose prices for their securities, as happens in private securities placements and bank lending. We identify equilibria in which high types issue underpriced debt, which yields positive expected profits to uninformed lenders, while low types issue steeper securities, such as equity. In addition, pooling equilibria exist in which all firms issue underpriced debt. Introducing pre-existing capital structures provides further foundations for pecking-order theories of external finance.
| Item Type: | Journal Article | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Subjects: | H Social Sciences > HG Finance | ||||||||
| Divisions: | Faculty of Social Sciences > Economics | ||||||||
| Library of Congress Subject Headings (LCSH): | Capital market, Stocks -- Prices , Insider trading in securities, Securities | ||||||||
| Journal or Publication Title: | Journal of Financial Economics | ||||||||
| Publisher: | Elsevier Science BV | ||||||||
| ISSN: | 0304-405X | ||||||||
| Official Date: | 2021 | ||||||||
| Dates: |
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| DOI: | 10.1016/j.jfineco.2021.08.021 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | In Press | ||||||||
| Access rights to Published version: | Restricted or Subscription Access | ||||||||
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