Designing Securities for Scrutiny

62 Pages Posted: 27 Mar 2017 Last revised: 20 Jul 2022

See all articles by Brendan Daley

Brendan Daley

Johns Hopkins University

Brett Green

Washington University in St. Louis - John M. Olin Business School

Victoria Vanasco

CREi ; Barcelona GSE; CEPR

Date Written: July 19, 2022


We investigate the effect of scrutiny (e.g., credit ratings, analyst reports, or mandatory disclosures) on the security design problem of a privately informed issuer. We show that scrutiny has important implications for both the form of security designed and the amount of inefficient retention of cash flows. The model predicts that issuers will design informationally sensitive securities (i.e., levered equity) when scrutiny is sufficiently intense. Otherwise, issuers opt for a standard debt contract. Scrutiny increases efficiency by decreasing issuers’ reliance on retention to signal quality, and perhaps counterintuitively, decrease price informativeness.

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

JEL Classification: G23, G32, D82

Suggested Citation

Daley, Brendan and Green, Brett and Vanasco, Victoria, Designing Securities for Scrutiny (July 19, 2022). Available at SSRN: or

Brendan Daley

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

Brett Green (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Victoria Vanasco

CREi ( email )

Barcelona, 08005
+34935422598 (Phone)

HOME PAGE: http://

Barcelona GSE ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005

CEPR ( email )

United Kingdom

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