Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/176925 
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper No. 6906
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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.
Subjects: 
disagreement
security design
optimism
overconfidence
pooling
behavioral finance
JEL: 
G30
G32
D84
D86
Document Type: 
Working Paper
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