Valuation, Adverse Selection, and Market Collapses
Name
Parker_Valuation, adverse selection.pdf
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331.63 KB
Format
Adobe PDF
Checksum (MD5)
4fd643585aac7d5e9bf74a9392095d04
Author(s)
Fishman, Michael J.
Parker, Jonathan A.
Date Issued
April 2015
Journal
Review of Financial Studies
Publisher
Oxford University Press
Citation
Fishman, Michael J. and Parker, Jonathan A. “Valuation, Adverse Selection, and Market Collapses.” Review of Financial Studies 28, no. 9 (April 2015): 2575–2607.
Version
Original manuscript
Abstract
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.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
https://doi.org/10.1093/rfs/hhv025
