Illuminating the Dark Side of Financial Innovation: The Role of Investor Information

61 Pages Posted: 15 Mar 2017 Last revised: 14 Feb 2019

See all articles by Manuel Ammann

Manuel Ammann

University of St. Gallen - School of Finance

Marc Arnold

University of St. Gallen - School of Finance

Simon Straumann

University of St. Gallen - School of Finance

Date Written: January 6, 2018

Abstract

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

Ammann, Manuel and Arnold, Marc and Straumann, Simon, Illuminating the Dark Side of Financial Innovation: The Role of Investor Information (January 6, 2018). University of St.Gallen, School of Finance Research Paper No. 2017/04; Paris December 2017 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2932067 or http://dx.doi.org/10.2139/ssrn.2932067

Manuel Ammann

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Marc Arnold

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Simon Straumann (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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