The Use (and Misuse) of Private Information in Financial Markets
Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Snehal Banerjee, University of California-San Diego
Dynamic Coordination with Flexible Security Design
AbstractBorrowers obtain funding for production by issuing securities backed by the current-period dividend and resale price of a long-lived collateral asset. Borrowers are privately informed about collateral quality. A higher (lower) resale price lowers (increases) adverse selection and makes the asset a good (lousy) collateral. Conversely, good (lousy) collateral has a high (low) resale price. When only equity is issued, this dynamic feedback between the asset price and collateral quality can lead to multiple equilibria. Optimal flexible security design eliminates multiple equilibria fragility and improves welfare through intertemporal coordination. When the security design is rigid, multiple equilibria reemerge.
Becker Meets Kyle: Inside Insider Trading
AbstractHow do illegal insiders trade on private information? Do they internalize legal risk? Using hand-collected data on insiders prosecuted by the SEC, we find that, consistent with Kyle (1985), insiders manage trade size and timing according to market conditions and the value of information. Gender, age, and profession play a lesser role. Various shocks to penalties and likelihood of prosecution show that insiders internalize legal risk by moderating aggressiveness, providing support to regulators’ deterrence ability. Consistent with Becker (1968), following positive shocks to expected penalties, insiders concentrate on fewer signals of higher value. Thus, enforcement actions could hamper price informativeness.
- G1 - General Financial Markets