Disagreement and Security Design

50 Pages Posted: 22 Jan 2018

See all articles by Juan Ortner

Juan Ortner

Boston University

Martin C. Schmalz

CEPR; University of Oxford - Finance; CESifo; European Corporate Governance Institute (ECGI)

Date Written: January 2018


We study optimal security design when the issuer and market participants agree to disagree about the characteristics of the asset to be securitized. We show that pooling assets can be optimal because it mitigates the effects of disagreement between issuer and investors, whereas tranching a cash-flow stream allows the issuer to exploit disagreement between investors. Interestingly, pooling and tranching can be complements. The optimality of debt with or without call provisions can be derived as a special case. In a model with multiple financing rounds, convertible securities naturally emerge to finance highly skewed ventures.

Keywords: behavioral finance, disagreement, Optimism, overconfidence, pooling, security design, tranching

JEL Classification: D84, D86, G30, G32

Suggested Citation

Ortner, Juan and Schmalz, Martin C. and Schmalz, Martin C., Disagreement and Security Design (January 2018). Available at SSRN: https://ssrn.com/abstract=3106799

Juan Ortner (Contact Author)

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Martin C. Schmalz

CEPR ( email )

United Kingdom

University of Oxford - Finance ( email )

United States

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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