Theoretical Corporate Finance

Information Asymmetry and Heterogeneous Trading

The authors analyze a multi-period model of trading with differentially informed traders, liquidity traders, and a market maker. Each informed trader’s initial information is a noisy estimate of the long-term value of the asset, and the different signals received by informed traders can have a variety of correlation structures. With this setup, informed traders not only compete with each other for trading profits, they also learn about other traders’ signals from the observed order flow. Their work suggests that the initial correlation among the informed traders’ signals has a significant effect on the informed trader’s profits and the informativeness of prices.

Leasing and Debt Capacity

This paper studies the financing role of leasing and secured lending. The authors argue that the benefit of leasing is that repossession of a leased asset is easier than foreclosure on the collateral of a secured loan, which implies that leasing has higher debt capacity than secured lending. However, leasing involves agency costs due to the separation of ownership and control. More financially constrained firms value the additional debt capacity more and hence lease more of their capital than less constrained firms. They provide empirical evidence consistent with this prediction. Their theory is consistent with the explanation of leasing by practitioners, namely that leasing “preserves capital,” which the academic literature considers a fallacy.