Information Acquisition and Corporate Debt Illiquidity

2016 American Economic Association Meeting

53 Pages Posted: 1 Nov 2014 Last revised: 20 Mar 2018

See all articles by Ilona Babenko

Ilona Babenko

Arizona State University

Lei Mao

The Chinese University of Hong Kong, Shenzhen

Date Written: March 10, 2018

Abstract

Models based on asymmetric information predict that debt is least sensitive to private information and cannot explain the illiquidity of corporate debt in secondary markets. We analyze security design with moral hazard and offer a new explanation. First, the optimal compensation contract creates incentives for the manager to engage in risk-shifting, making her interests congruent with those of shareholders. Second, because debtholders are negatively affected by risky investment, they have an incentive to acquire information and discipline the manager. Debtholders' information acquisition solves the moral hazard problem, but makes debt less liquid than equity. Debt illiquidity covaries with credit risk.

Keywords: Security design, information acquisition, corporate governance, securitization

JEL Classification: D82, G32, D86

Suggested Citation

Babenko, Ilona and Mao, Lei, Information Acquisition and Corporate Debt Illiquidity (March 10, 2018). 2016 American Economic Association Meeting. Available at SSRN: https://ssrn.com/abstract=2517974 or http://dx.doi.org/10.2139/ssrn.2517974

Ilona Babenko

Arizona State University ( email )

Department of Finance
W.P. Carey School of Business
Tempe, AZ 85287
United States

Lei Mao (Contact Author)

The Chinese University of Hong Kong, Shenzhen ( email )

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