Disagreement and security design
Files
First author draft
Date
2018-02-21
DOI
Authors
Ortner, Juan
Schmalz, Martin C.
Version
OA Version
Citation
Juan Ortner, Martin C Schmalz. 2018. "Disagreement and Security Design." CESifo Working Paper Series No. 6906.
Abstract
We study optimal security design when the issuer and market participants agree to disagree about the characteristics of the asset to be securitized. We show that pooling assets can be optimal because it mitigates the effects of disagreement between issuer and investors, whereas tranching a cash-flow stream allows the issuer to exploit disagreement between investors. Interestingly, pooling and tranching can be complements. The optimality of debt with or without call provisions can be derived as a special case. In a model with multiple financing rounds, convertible securities naturally emerge to finance highly skewed ventures.