FRIC/Finance Seminar with Andrey Malenko, Boston College, Carroll School of Management

The Department of Finance and FRIC, Center for Financial Frictions, are proud to announce the upcoming seminar with Andrey Malenko, Boston College, Carroll School of Management.

Andrey Malenko will present:

Asymmetric Information and Security Design under Knightian Uncertainty

ABSTRACT
An issuer, privately informed about the distribution of the project’s cash flows, raises financing from an uninformed investor through a security sale. The investor faces Knightian uncertainty about the distribution of cash flows and evaluates each security by the worst-case distribution at which she could justify it being offered by the issuer. Both outside equity and risky debt arise in equilibrium, which provides a common foundation for two widespread financial contracts. The equilibrium security depends on the degree of uncertainty and the nature of private information. If private information concerns a new project and uncertainty is sufficiently high, outside equity arises in equilibrium. When uncertainty is sufficiently small, the equilibrium typically features risky debt and never outside equity. Both securities arise in the intermediate case. If private information concerns assets in place, equity is never issued, irrespective of the level of uncertainty, and the equilibrium security is (usually) risky debt.

Location:
Solbjerg Plads 3,
2000 Frederiksberg
Room: SPs03