Optimality of Securitized Debt with Endogenous and Flexible Information Acquisition

Abstract

We study the optimality of debt through the interaction between security design and information acquisition. An impatient seller designs a security backed by her asset in place and a buyer decides whether to buy the security in order to provide liquidity. Facing different securities, the buyer has incentives to acquire information from different aspects of the fundamental, which in turn affects security design. Specifically, the buyer benefits from information acquisition at the expense of the seller through adverse selection. The seller hence deliberately designs the security to induce the buyer to acquire the information that is least harmful to the seller's interest. Since securities can be designed in arbitrary ways, the resulting incentive to acquire information is very flexible. We introduce flexible information acquisition to capture this interaction. Debt is uniquely optimal when aggregate cash flow is fixed. We do not assume monotonicity of the feasible securities nor impose various distributional assumptions on information structures. Instead, we identify conditions for general information costs that support the results.