publication . Article . Book . 2018

Optimal Security Design under Asymmetric Information and Profit Manipulation

Kostas Koufopoulos; Roman Kozhan; Giulio Trigilia;
Open Access
  • Published: 28 Nov 2018 Journal: The Review of Corporate Finance Studies, volume 8, pages 146-173 (issn: 2046-9128, eissn: 2046-9136, Copyright policy)
  • Publisher: Oxford University Press (OUP)
  • Country: United Kingdom
Abstract
We consider a model of external financing under ex ante asymmetric information and profit manipulation (non verifability). Contrary to conventional wisdom, the optimal contract is not standard debt, and it is not monotonic. Instead, it resembles a contingent convertible (CoCo) bond. In particular: (i) if the profit manipulation and/or adverse selection are not severe, there exists a unique separating equilibrium in CoCos; (ii) in the intermediate region, if the distribution of earnings is unbounded above there exists a unique pooling equilibrium in CoCos, otherwise debt might be issued but it is never the unique equilibrium; (iii) finally, if profit manipulation...
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doi: 10.1093/rcfs/cfy008 , 10.2139/ssrn.2565739 , 10.2139/ssrn.2458980
Subjects
free text keywords: HB, HG, Security design, Business, Information asymmetry, Computer security, computer.software_genre, computer, Debt, media_common.quotation_subject, media_common, Microeconomics, Capital structure, Adverse selection, Earnings, Profit (economics), Industrial organization, External financing, Pooling
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