| This dissertation considers the problem of raising capital when there is uncertainty concerning firm value. Earlier literature tends to address observable characteristics of the security offering, and what inferences can be made from these. That approach (signalling) provides one scheme by which this uncertainty can be resolved. This dissertation explores an alternative mechanism: we endow the investor with technology to directly evaluate the firm at some private cost.; These two mechanisms can function either as substitutes or as complements; their substitutability results in the overturning of some well-known results in corporate finance. The first two chapters address results from the capital structure and debt maturity literature, respectively, which say that the optimal security is that which minimizes the difference between the payouts of good and bad firms. This yields debt—more specifically, short-term debt. In this dissertation, it is no longer generally optimal to minimize the difference between good and bad firms: doing so creates less incentive for the investor to screen firms. The implication for the debt maturity literature is that there are conditions under which long-term debt is optimal, and for the capital structure literature, conditions under which equity-like securities are optimal.; The final chapter endogenizes both (1) an intermediary's screening of new issues and (2) information production of investors, making it the first characterization of double-sided information production. The two sides are nontrivially linked—with low investor information production, the intermediary would sell to an essentially uninformed pool. However, sale outcomes uncorrelated with true value give no reason to screen out bad firms if doing so is costly. This reasoning implies that the banker wishes to structure a sale conducive to investors' research; otherwise, his own moral hazard problem prevents high equilibrium prices. This investor learning serves as a complement to the intermediary's reputation in ensuring that good quality firms are taken public. One application of this link between the sides of information production is that bigger pools of investors are not always optimal—in contrast to most IPO models. |
