SIFR Research Report Series,
Institute for Financial Research

Abstract: I study the security design problem of a firm when investors rather than managers have private information about the firm. I find that it is often optimal to issue information-sensitive securities like equity. The "folklore proposition of debt" from traditional signalling models only goes through if the firm can vary the face value of debt with investor demand. When the firm has several assets, debt backed by a pool of assets is optimal when the degree of competition among investors is low, while equity backed by individual assets can be optimal when competition is high.

Keywords: Security design; Capital Structure; Auctions; Asset backed securities

JEL-codes: D44; G32

54 pages, October 15, 2005

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