Abstract
Classical security design papers equate competitive capital markets to securities being fairly priced in expectation. We revisit Nachman and Noe’s (1994) adverse selection setting, modeling capital market competition as free entry of investors and allowing firms to propose prices for their securities, as happens in private securities placements and bank lending. We identify equilibria in which high types issue underpriced debt, which yields positive expected profits to uninformed lenders, while low types issue steeper securities, such as equity. In addition, pooling equilibria exist in which all firms issue underpriced debt. Introducing pre-existing capital structures provides further foundations for pecking-order theories of external finance.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
