Persuading large investors

Alonso, Ricardo ORCID: 0000-0001-9559-0864 and Zachariadis, Konstantinos E. (2024) Persuading large investors. Journal of Economic Theory, 222. ISSN 0022-0531

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Abstract

A regulator who designs a public stress test to avert default of a distressed bank via private investment must account for large investors' private information on the bank's state. We provide conditions for crowding-in (crowding-out) so that the regulator offers an endogenous more (less) informative signal to better-informed investors. We show that crowding-in occurs as long as investors remain responsive to public news and they are sufficiently well informed: the regulator's test perfectly reveals the state as investors' become privately perfectly informed. Investors' value from more precise private signals may come from their effect on the public test's precision.

Item Type:	Article
Additional Information:	© 2024 The Author(s)
Divisions:	Management
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
Date Deposited:	12 Nov 2024 17:33
Last Modified:	10 Oct 2025 06:45
URI:	http://eprints.lse.ac.uk/id/eprint/126040

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