Valuation, Adverse Selection, and Market Collapses

44 Pages Posted: 8 Sep 2012

See all articles by Michael J. Fishman

Michael J. Fishman

Kellogg School of Management - Department of Finance

Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: September 2012

Abstract

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.

Suggested Citation

Fishman, Michael Jay and Parker, Jonathan A., Valuation, Adverse Selection, and Market Collapses (September 2012). NBER Working Paper No. w18358, Available at SSRN: https://ssrn.com/abstract=2143545

Michael Jay Fishman (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States
847-491-8332 (Phone)
847-491-5719 (Fax)

Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA
United States
617-253-7218 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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