Abstract

A risk-averse agent can sell claims to an asset of uncertain value to investors who have private information. When investors can choose how much information to acquire, the agent optimally issues information-sensitive securities in each market (e.g., debt and equity). When the value of the asset varies over time, the agent chooses to retain and, at times, repurchase a portion of the claims for issuance at a later date. The agent’s choice to smooth the information sensitivity of the claims issued, across markets and over time, has novel implications. First, the relative information insensitivity of debt can render it a suboptimal security for financing. Second, if the agent has private information about cash flows, he can signal that he has better information by selling, rather than retaining, a larger claim to the asset. Finally, while the sale of illiquid securities generates increased uncertainty at issuance, it can lower the agent’s uncertainty when raising capital in the future.

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• Keyword(s):
• finance 266
• investments 83
• risk management 54

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