NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Bhagwan Chowdhry

Anderson Graduate School of Management
UC, Los Angeles
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NBER Working Papers and Publications

January 2002Information Aggregation, Security Design and Currency Swaps
with Mark Grinblatt, David Levine: w8746
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 variab...

Published: Chowdhry, Bhagwan, Mark Grinblatt and David Levine. "Information Aggregation, Security Design, And Currency Swaps," Journal of Political Economy, 2002, v110(3,Jun), 609-633. citation courtesy of

 
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