Informational black holes in financial markets

Ulf Axelson and Igor Makarov

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2023-12-01
New Economics Papers: this item is included in nep-ppm
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Published in Journal of Finance, 1, December, 2023, 78(6), pp. 3099 - 3140. ISSN: 0022-1082

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:105042

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