Illuminating the dark side of financial innovation : the role of investor information

This dissertation consists of three independent papers. The first paper investigates the role of incomplete investor information in financial innovations. We analyze the information that structured product issuers provide to the investors and find that issuers have an information advantage over investors regarding two important valuation parameters: volatility and dividends. This advantage allows issuers to push overpriced securities to investors and induces them to design products with large information frictions. The insights are of systemic importance because they suggest that product issuers' behavior increases information frictions in the financial system.