NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Valuation, Adverse Selection, and Market Collapses

Michael J. Fishman, Jonathan A. Parker

NBER Working Paper No. 18358
Issued in September 2012, Revised in April 2014
NBER Program(s):Asset Pricing, Corporate Finance, Economic Fluctuations and Growth, Monetary Economics

We study a market for funding real investment in which valuation creates information on which adverse selection can occur. Unlike in previous models, higher amounts of valuation are associated with lower market prices and so greater returns to valuation, and this strategic complementarity in the capacity to do valuation generates multiple equilibria. In this region, the equilibrium without valuation is always more efficient despite funding projects that valuation would reveal as unprofitable. Valuation equilibria look like credit crunches. A large investor can ensure the efficient equilibrium only if it can precommit to a price and, for some parameters, only if subsidized.

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Document Object Identifier (DOI): 10.3386/w18358

Published: Michael J. Fishman & Jonathan A. Parker, 2015. "Valuation, Adverse Selection, and Market Collapses," Review of Financial Studies, vol 28(9), pages 2575-2607. citation courtesy of

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