Illuminating the Dark Side of Financial Innovation: The Role of Investor Information
61 Pages Posted: 15 Mar 2017 Last revised: 14 Feb 2019
Date Written: January 6, 2018
This paper investigates the role of incomplete investor information in financial innovations. By analyzing the information that structured product issuers provide to the investors of those products, we find that issuers have an information advantage over investors regarding two important valuation parameters: volatility and dividends. This advantage allows issuers to push overpriced securities to investors and induces them to design products with large information frictions. We confirm our conjecture that issuers exploit their superior information in a regression discontinuity design. The insights are of systemic importance because they suggest that product issuers' behavior increases information frictions in the financial system.
Keywords: Structured products, investor information, financial innovation
JEL Classification: D8, G34, M52
Suggested Citation: Suggested Citation