RFS Advance Access originally published online on January 27, 2009
Review of Financial Studies 2009 22(11):4787-4820; doi:10.1093/rfs/hhn119
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The Sale of Multiple Assets with Private Information
Booth School of Business, University of Chicago
Send correspondence to Zhiguo He, Booth School of Business, University of Chicago, 5807 South Woodlawn Ave., Chicago, IL 60637; telephone: 773-834-3769. E-mail: zhiguo.he{at}chicagogsb.edu.
JEL Classification: D40, D82, G20
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Abstract |
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By generalizing the Leland and Pyle (1977) model to the case of multiple correlated assets, this paper studies the signaling and hedging behavior of an intermediary who sells multiple assets in financial markets. Based on information asymmetry, this paper demonstrates the intrinsic interdependence of risk management and asset selling for intermediaries, and obtains several testable empirical implications. For instance, an intermediary with a more diversified underlying portfolio will face greater liquidity (a smaller price impact) when selling assets to the market. Several applications are discussed, including bank loan sales and selling mechanisms.
I thank my advisors in the Kellogg School of Management at Northwestern University, Mike Fishman and Arvind Krishnamurthy, for endless encouragement and support and the editor, Matthew Spiegel, for detailed instructions and insightful comments. I am also grateful to Bob McDonald, Alan Morrison (2006 AFA discussant), Vadim di Pietro, two anonymous referees, and participants at the AFA (2006) Boston meeting for numerous valuable suggestions. All errors are my own.