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Private Information and the Design of Securities

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  • Demange Gabrielle
  • Laroque Guy

Abstract

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.
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Suggested Citation

  • Demange Gabrielle & Laroque Guy, 1995. "Private Information and the Design of Securities," Journal of Economic Theory, Elsevier, vol. 65(1), pages 233-257, February.
    • Handle: RePEc:eee:jetheo:v:65:y:1995:i:1:p:233-257
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    Cited by:

    1. David M. Frankel & Yu Jin, 2015. "Securitization and Lending Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(4), pages 1383-1408.
    2. David Russ, 2020. "Multidimensional Noise and Non-Fundamental Information Diversity," Working Papers 201, Bavarian Graduate Program in Economics (BGPE).
    3. Gabriella Chiesa & Giovanna Nicodano, 2003. "Privatization and Financial Market Development: Theoretical Issues," Working Papers 2003.1, Fondazione Eni Enrico Mattei.
    4. Kajii, A. & Hara, C., 2000. "On the Range of the Risk-Free Interest Rate in Incomplete Markets," Cambridge Working Papers in Economics 0030, Faculty of Economics, University of Cambridge.
    5. Gabrielle Demange & Guy Laroque, 1994. "Information asymétrique et émission d'actifs," Revue Économique, Programme National Persée, vol. 45(3), pages 639-656.
    6. Arnold, Lutz G. & Zelzner, Sebastian, 2022. "Financial trading versus entrepreneurship: Competition for talent and negative feedback effects," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 186-199.
    7. Luis Angel Medran & Xavier Vives, 2004. "Regulating Insider Trading When Investment Matters," Review of Finance, European Finance Association, vol. 8(2), pages 199-277.
    8. García, Diego & Urošević, Branko, 2013. "Noise and aggregation of information in large markets," Journal of Financial Markets, Elsevier, vol. 16(3), pages 526-549.
    9. Marta Faias, 2004. "General equilibrium and endogenous creation of asset markets," Nova SBE Working Paper Series wp454, Universidade Nova de Lisboa, Nova School of Business and Economics.
    10. Jin, Yu, 2012. "Essays on financial institutions and instability," ISU General Staff Papers 201201010800003361, Iowa State University, Department of Economics.
    11. Shiller, Robert J., 1999. "Social security and institutions for intergenerational, intragenerational, and international risk-sharing," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 165-204, June.
    12. Han Ozsoylev, 2008. "Amplification and asymmetry in crashes and frenzies," Annals of Finance, Springer, vol. 4(2), pages 157-181, March.
    13. Diego García & Branko Urosevic, 2004. "Noise and aggregation of information in large markets," Economics Working Papers 785, Department of Economics and Business, Universitat Pompeu Fabra.
    14. Russ, David, 2022. "Multidimensional noise and non-fundamental information diversity," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    15. Kawamura, Enrique, 2004. "Investors's distrust and the marketing of new financial assets," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(2), pages 265-295, May.
    16. Arnold, Lutz Georg & Arnold, Lutz & Zelzner, Sebastian, 2016. "The Allocation of Talent to Financial Trading versus Production: Welfare and Employment Effects of Trading in General Equilibrium," VfS Annual Conference 2016 (Augsburg): Demographic Change 145688, Verein für Socialpolitik / German Economic Association.

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