Security Design with Ratings

37 Pages Posted: 27 Mar 2017 Last revised: 18 May 2020

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: May 18, 2020


We investigate the effect of public information, such as ratings, on the security design problem of a privately informed issuer. We show that the presence of ratings has important implications for both the form of security designed and the amount of inefficient retention. The model predicts that issuers will design informationally sensitive securities (i.e., levered equity) when ratings are sufficiently informative relative to the gains from trade. Otherwise, issuers opt for a standard debt contract. In either case, informative ratings increase market liquidity by decreasing the reliance on inefficient retention to convey high 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, Security Design with Ratings (May 18, 2020). 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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