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Security Design with Ratings

29 Pages Posted: 27 Mar 2017  

Brendan Daley

University of Colorado, Boulder

Brett S. Green

University of California, Berkeley - Haas School of Business

Victoria Vanasco

Stanford Graduate School of Business

Date Written: July 2016

Abstract

We investigate the effect of ratings on the security design problem of a privately informed issuer. We find that the presence of ratings has important implications for the form of security designed (e.g., equity, debt, etc.), the level of seller retention, and price informativeness. The model rationalizes the issuance of securities that are informationally insensitive (standard debt) and informationally sensitive (levered-equity), depending on the informativeness of ratings. Furthermore, we show that the introduction of sufficiently informative ratings efficiently increases market liquidity by decreasing the reliance on inefficient retention to convey high quality. Perhaps counterintuitively, the presence of informative ratings actually decreases the amount of information transmitted to investors and prices become less informative.

Keywords: Security Design, Liquidity, Private Information, Credit Ratings, Public Disclosure

JEL Classification: G23, G32, D82

Suggested Citation

Daley, Brendan and Green, Brett S. and Vanasco, Victoria, Security Design with Ratings (July 2016). Available at SSRN: https://ssrn.com/abstract=2940791

Brendan Daley

University of Colorado, Boulder ( email )

Campus Box 419
Boulder, CO
United States

Brett Green (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

2220 Piedmont Avenue
Berkeley, CA ca 94720
United States
5105759980 (Phone)

HOME PAGE: http://faculty.haas.berkeley.edu/bgreen/

Victoria Vanasco

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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