Essays on the pricing and structure of financial claims under asymmetric information

Financial claims are viewed as structured to minimize the effects of differences in information between investors and lenders, on the one hand, and firm managers on the other hand. In the first essay, some firms have risk characteristics which are easily observable to open-market investors. These firms can raise financing by issuing simple debt contracts, such as commercial paper. Other firms with risk characteristics which are not observable to outsiders rely on financial intermediaries to provide financing and information gathering services jointly. Solving a simple general equilibrium model of credit allocation between these two types of firms gives an expression for the commercial paper and bank lending rate spread which produces countercyclical movements in the spread and in the volume of commercial paper under certain conditions. The second essay considers the underpricing of new equity issues when the management of firms issuing equity is assumed to be partial to the interests of old shareholders. Firms with high-yield assets cannot differentiate themselves from firms with poor assets, so the equity of firms with high-yield assets is undervalued. The equity undervaluation problem is analyzed in the context of a large firm with decentralized investment decisions. If information does not flow evenly throughout all levels of management, then the ability of management to take advantage of new shareholders is reduced, and furthermore the information of investors about the value of firms issuing new equity is improved. The third essay compares the savings in duplication of verification costs realized when lending occurs through a financial intermediary to the savings when delegation of verification is achieved by staggering the seniority of direct one-on-one debt contracts.