Survey_MP_2014

Abstract

Speciccally, we set out a simple model where the issuer of an asset places it with one of many competing dealers, who sells it to investors through a search market that randomly matches him with buyers. The price at which the issuer can initially place the asset with the dealer depends on the expected price on this search market. The sale of an asset-backed security (ABS) is one example: the ABS is placed by its originator (e.g. a bank wishing to o­ oad a loan pool from its balance sheet) with an underwriter who searches for buyers via an Over-The-Counter (OTC) market. Another example is that of a company that hires a broker to sell its shares via a private placement or a Direct Public O§ering (DPO) to investors, who can trade them on the Pink Sheet market or the OTC Bulletin Board. Before the asset is initially placed with investors, the issuer can disclose fundamental information about the asset, e.g. data about the loan pool underlying the ABS. If information is disclosed, investors must decide what weight to assign to it in judging its price implications, balancing the beneÖt to trading decisions against the cost of paying more attention. We show that when investors di§er in processing ability, disclosure generates adverse selection: investors with limited processing ability will worry that if the asset has not already been bought by others, it could be because more sophisticated investors, who are better at understanding the price implications of new information, concluded that the asset is not worth buying. This depresses the price that unsophisticated investors are willing to pay, in turn the sophisticated investors, anticipating that the seller will have a hard time Önding buyers among the unsophisticated, will o§er a price below the no-disclosure level. We extend the model in three directions. First, we allow the sophisticated investors to acquire a costly signal about the assetís payo§ when no public information is disclosed by the issuer. We show that this possibility increases the issuerís incentives to disclose. Intuitively, if in the absence of disclosure only speculators can acquire information privately, less sophisticated investors will be totally uninformed and therefore less eager to bid for the asset than under disclosure, which would at least allow them to process public information. As a result, the possibility of private information acquisition elicits disclosure from issuers who would otherwise prefer no disclosure. Second, we explore whether the seller might avoid the informational externality by committing to sell only to hedgers, since the externality is triggered by speculators. However, we show that such a commitment by the seller may not be credible. Third, we extend the model to the case in which the seller has private information about the value of the asset, and show that model is robust to this change in assumptions.