TY  - JOUR
AU  - Chowdhry,Bhagwan
AU  - Grinblatt,Mark
AU  - Levine,David
TI  - Information Aggregation, Security Design and Currency Swaps
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8746
PY  - 2002
Y2  - January 2002
UR  - http://www.nber.org/papers/w8746
L1  - http://www.nber.org/papers/w8746.pdf
N1  - Author contact info:
Bhagwan Chowdhry
Anderson Graduate School of Management
UC, Los Angeles
C 411 Entrepreneurs Hall
110 Westwood Plaza
Los Angeles, CA 90095-1481
Tel: 310/825-5883
Fax: 310/825-1953
E-Mail: bhagwan.chowdhry@anderson.ucla.edu

Mark Grinblatt
UCLA
Anderson Graduate School of Management
110 Westwood Plaza, Box 951481
Los Angeles, CA  90095-1481
Tel: 310/825-1098
Fax: 310/206-5455
E-Mail: mark.grinblatt@anderson.ucla.edu

David Levine
Haas School of Business
University of California
Berkeley CA 94720-1900
Tel: 510/642-1697
E-Mail: levine@haas.berkeley.edu
AB  - A model of security design based on the principle of information aggregation and alignment is used to show that (i) firms needing to finance their operations should issue different securities to different groups of investors in order to aggregate their disparate information and (ii) each security should be highly correlated (closely aligned) with the private information signal of the investor to whom it is marketed. This alignment reduces the adverse selection penalty paid by a firm with superior information. Adverse selection costs are often contingent on ex post publicly observable and contractible state variables such as exchange rates. In such cases, debt contracts are dominated by currency swaps. Moreover, optimal securities are derivative contracts that are contingent on state variables that influence adverse selection costs. This is because the netting of cash flows in these derivative contracts, in effect, alters the state-by-state seniority of different claims in a desirable way.
ER  -