Separating equilibria, underpricing and security design

Dan Bernhardt, Kostas Koufopoulos, Giulio Trigilia

Research output: Contribution to journalArticlepeer-review


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 languageEnglish
Pages (from-to)788-801
Number of pages14
JournalJournal of Financial Economics
Issue number3
Early online date22 Jul 2022
Publication statusPublished - 1 Sept 2022

Bibliographical note

© 2021 Elsevier B.V. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy.

Cite this