Security Design

Authors

  • ARNOUD W. A. BOOT,

  • ANJAN V. THAKOR

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    • Boot is from the University of Amsterdam (The Netherlands) and is currently on the faculty of the J. L. Kellogg Graduate School of Management, Northwestern University, and Thakor is from the School of Business, Indiana University. We thank Phil Dybvig, Kerry Back, Peter DeMarzo, Michael Fishman, Robert Heinkel, David Hirshleifer, Alan Hess, Chris Lamoureux, Antonio Mello, an anonymous referee, René Stulz (the editor), and participants at finance workshops at Northwestern University, Washington University, the University of Oregon, the CentER at Tilburg University (The Netherlands), and the Third Summer Symposium of the European Science Foundation Network in Financial Markets in Gerzensee (Switzerland) for helpful comments. Only the authors are responsible for the contents of this paper.

ABSTRACT

We explain why an issuer may wish to raise external capital by selling multiple financial claims that partition its total asset cash flows, rather than a single claim. We show that, in an asymmetric information environment, the issuer's expected revenue is enhanced by such cash flow partitioning because it makes informed trade more profitable. This approach seems capable of shedding light on corporate incentives to issue debt and equity, as well as on financial intermediaries' incentives to issue multiple classes of claims against portfolios of securitized assets.

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