Securitization and Real Investment in Incomplete Markets
We study the impact of financial innovations on real investmentdecisions within the framework of an incomplete market economy comprisedof fi rms, investors, and an intermediary. The fi rms face uniqueinvestment opportunities that arise in their business operations and canbe undertaken at given reservation prices. The cash flows thus generatedare not spanned by the securities traded in the fi nancial market, andcannot be valued uniquely. The intermediary purchases claims againstthese cash flows, pools them together, and sells tranches of primary orsecondary securities to the investors. We derive necessary and suffcientconditions under which projects are undertaken due to the intermediary'sactions, and firms are amenable to the pool proposed by theintermediary, compared to the no-investment option or the option offorming alternative pools. We also determine the structure of the newsecurities created by the intermediary and identify how it exploits thearbitrage opportunities available in the market. Our results haveimplications for valuation of real investments, synergies among them,and their fi nancing mechanisms. We illustrate these implications usingan example of inventory decisions under random demand.
Year of publication: |
2009-09-03
|
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Authors: | Subrahmanyam, Marti ; Gaur, Vishal ; Seshadri, Sridhar |
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