Valuation, Adverse Selection, and Market Collapses
We study a market for funding real investment where valuation—meaning investors devoting resources to acquiring information about future payoffs—creates an adverse selection problem. Unlike previous models, more valuation is associated with lower market prices and so greater returns to valuation. Th...
| Main Authors: | , |
|---|---|
| Other Authors: | |
| Format: | Article |
| Language: | en_US |
| Published: |
Oxford University Press
2017
|
| Online Access: | http://hdl.handle.net/1721.1/109137 https://orcid.org/0000-0001-5441-6296 |
| _version_ | 1811080796207841280 |
|---|---|
| author | Fishman, Michael J. Parker, Jonathan A. |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Fishman, Michael J. Parker, Jonathan A. |
| author_sort | Fishman, Michael J. |
| collection | MIT |
| description | We study a market for funding real investment where valuation—meaning investors devoting resources to acquiring information about future payoffs—creates an adverse selection problem. Unlike previous models, more valuation is associated with lower market prices and so greater returns to valuation. This strategic complementarity in the capacity to do valuation generates multiple equilibria. With multiple equilibria, the equilibrium without valuation is most efficient despite funding some unprofitable investments. Switches to valuation equilibria, valuation runs, look like credit crunches. A large investor can ensure the efficient equilibrium only if it can precommit to a price and potentially, only if subsidized. |
| first_indexed | 2024-09-23T11:37:00Z |
| format | Article |
| id | mit-1721.1/109137 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T11:37:00Z |
| publishDate | 2017 |
| publisher | Oxford University Press |
| record_format | dspace |
| spelling | mit-1721.1/1091372024-07-11T19:50:49Z Valuation, Adverse Selection, and Market Collapses Fishman, Michael J. Parker, Jonathan A. Sloan School of Management Parker, Jonathan A. We study a market for funding real investment where valuation—meaning investors devoting resources to acquiring information about future payoffs—creates an adverse selection problem. Unlike previous models, more valuation is associated with lower market prices and so greater returns to valuation. This strategic complementarity in the capacity to do valuation generates multiple equilibria. With multiple equilibria, the equilibrium without valuation is most efficient despite funding some unprofitable investments. Switches to valuation equilibria, valuation runs, look like credit crunches. A large investor can ensure the efficient equilibrium only if it can precommit to a price and potentially, only if subsidized. 2017-05-17T14:13:42Z 2017-05-17T14:13:42Z 2015-04 Article http://purl.org/eprint/type/JournalArticle 0893-9454 1465-7368 http://hdl.handle.net/1721.1/109137 Fishman, Michael J. and Parker, Jonathan A. “Valuation, Adverse Selection, and Market Collapses.” Review of Financial Studies 28, no. 9 (April 2015): 2575–2607. https://orcid.org/0000-0001-5441-6296 en_US http://dx.doi.org/10.1093/rfs/hhv025 Review of Financial Studies Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf Oxford University Press NBER |
| spellingShingle | Fishman, Michael J. Parker, Jonathan A. Valuation, Adverse Selection, and Market Collapses |
| title | Valuation, Adverse Selection, and Market Collapses |
| title_full | Valuation, Adverse Selection, and Market Collapses |
| title_fullStr | Valuation, Adverse Selection, and Market Collapses |
| title_full_unstemmed | Valuation, Adverse Selection, and Market Collapses |
| title_short | Valuation, Adverse Selection, and Market Collapses |
| title_sort | valuation adverse selection and market collapses |
| url | http://hdl.handle.net/1721.1/109137 https://orcid.org/0000-0001-5441-6296 |
| work_keys_str_mv | AT fishmanmichaelj valuationadverseselectionandmarketcollapses AT parkerjonathana valuationadverseselectionandmarketcollapses |