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Informational black holes in financial markets

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Listed:
  • Axelson, Ulf
  • Makarov, Igor

Abstract

We show that information aggregation in primary financial markets fails precisely when investors hold socially useful information for screening projects. Being wary of the Winner's Curse, less optimistic investors refrain from making financing offers, since their offers would be accepted only when a project is unviable. Their information is therefore lost. The Winner's Curse and associated information loss grow with the number of informed market participants, so that larger markets can lead to worse financing decisions and higher cost of capital for firms seeking financing. Precommitment to ration fundraising allocations, collusive club bidding, and shorting markets can mitigate the inefficiency.

Suggested Citation

  • Axelson, Ulf & Makarov, Igor, 2023. "Informational black holes in financial markets," LSE Research Online Documents on Economics 105042, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:105042
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    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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