Disagreement and Optimal Security Design

49 Pages Posted: 20 Apr 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)

Multiple version iconThere are 2 versions of this paper

Date Written: February 21, 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: disagreement, security design, optimism, overconfidence, pooling, behavioral finance

JEL Classification: G300, G320, D840, D860

Suggested Citation

Ortner, Juan and Schmalz, Martin C. and Schmalz, Martin C., Disagreement and Optimal Security Design (February 21, 2018). CESifo Working Paper Series No. 6906, Available at SSRN: https://ssrn.com/abstract=3165337

Juan Ortner

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Martin C. Schmalz (Contact Author)

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 )

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1000 Brussels

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