Informational black holes in financial markets

Axelson, Ulf ORCID: 0000-0002-1265-2714 and Makarov, Igor ORCID: 0009-0006-7557-449X (2023) Informational black holes in financial markets. Journal of Finance, 78 (6). 3099 - 3140. ISSN 0022-1082

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Abstract

We show that information aggregation in primary financial markets fails precisely when investors hold socially useful information for screening projects. Being wary of the Winner's Curse, less optimistic investors refrain from making financing offers, since their offers would be accepted only when a project is unviable. Their information is therefore lost. The Winner's Curse and associated information loss grow with the number of informed market participants, so that larger markets can lead to worse financing decisions and higher cost of capital for firms seeking financing. Precommitment to ration fundraising allocations, collusive club bidding, and shorting markets can mitigate the inefficiency.

Item Type:	Article
Official URL:	https://onlinelibrary.wiley.com/journal/15406261
Additional Information:	© 2023 The Author(s)
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
Date Deposited:	09 Jun 2020 15:21
Last Modified:	23 Nov 2024 08:45
URI:	http://eprints.lse.ac.uk/id/eprint/105042

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