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Optimal design of securities under asymmetric information

Abstract:

A firm must decide what security to sell to raise external capital to finance a profitable investment opportunity. There is ex ante asymmetry of information regarding the probability distribution of cashflow generated by the investment. In this setting, we derive necessary and sufficient conditions for a security to be optimal (uniquely optimal), that is, for pooling at this security to be an (the unique) equilibrium outcome. Using these conditions we show that the debt contract is (uniquely)...

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Publication date:
1994-01-01
URN:
uuid:df4c1478-2dbd-4c7b-9c09-b255cbdd37cb
Local pid:
oai:eureka.sbs.ox.ac.uk:1147

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