Separating equilibria, underpricing and security design

Dan Bernhardt; Kostas Koufopoulos; Giulio Trigilia

doi:10.1016/j.jfineco.2021.08.021

Separating equilibria, underpricing and security design

Dan Bernhardt, Kostas Koufopoulos, Giulio Trigilia

Economics

Research output: Contribution to journal › Article › peer-review

Abstract

Classical security design papers equate competitive capital markets to securities
being fairly priced in expectation. We revisit Nachman and Noe (1994)'s 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 prots to uninformed lenders, while low types issue steeper securities, such as equity. In addition, pooling equilibria exist in which firms issue underpriced debt. Introducing pre-existing capital structures provides further foundations for pecking-order theories of external finance.

Original language	English
Pages (from-to)	788-801
Number of pages	14
Journal	Journal of Financial Economics
Volume	145
Issue number	3
Early online date	22 Jul 2022
DOIs	https://doi.org/10.1016/j.jfineco.2021.08.021
Publication status	Published - 1 Sept 2022

Bibliographical note

Access to Document

10.1016/j.jfineco.2021.08.021

Separating equilibria, under-pricing and security design (JFE Accepted Version, 22-07-2021)
© 2021 Elsevier B.V. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy.
Accepted author manuscript, 382 KBLicence: CC BY-NC-ND

Cite this

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