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Informational black holes in financial markets

Axelson, Ulf and Makarov, Igor (2020) Informational black holes in financial markets. Journal of Finance. ISSN 0022-1082 (In Press)

[img] Text (Informational black holes in financial markets) - Accepted Version
Pending embargo until 1 January 2100.

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Identification Number: 10.1111/jofi.13270


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:
Additional Information: © 2020 The Author(s)
Divisions: Finance
Subjects: H Social Sciences > HG Finance
Date Deposited: 09 Jun 2020 15:21
Last Modified: 05 Jul 2024 20:45

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