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Why Government Bonds Are Sold by Auction and Corporate Bonds by Posted-Price Selling

Author

Listed:
  • Michel A. Habib

    (Swiss Banking Institute, University of Zurich)

  • Alexandre Ziegler

    (Ecole des HEC, University of Lausanne and FAME)

Abstract
When information is costly, a seller may wish to prevent prospective buyers from acquiring information, for the cost of information acquisition is ultimately borne by the seller. A seller can achieve the desired prevention of information acquisition through posted-price selling, by offering prospective buyers a discount that is such as to deter them from gathering information. No such prevention is possible in the case of an auction. Clearly, a discount is costly to the seller. We establish the result that the seller prefers posted-price selling when the cost of information acquisition is high, and auctions when it is low. We view corporate bonds as an instance of the former case, and government bonds as an instance of the latter.

Suggested Citation

  • Michel A. Habib & Alexandre Ziegler, 2003. "Why Government Bonds Are Sold by Auction and Corporate Bonds by Posted-Price Selling," FAME Research Paper Series rp78, International Center for Financial Asset Management and Engineering.
    • Handle: RePEc:fam:rpseri:rp78
    as

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    File URL: http://www.swissfinanceinstitute.ch/rp78.pdf
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    References listed on IDEAS

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    Cited by:

    1. Sherman, Ann E., 2005. "Global trends in IPO methods: Book building versus auctions with endogenous entry," Journal of Financial Economics, Elsevier, vol. 78(3), pages 615-649, December.
    2. Ravi Jagannathan & Ann E. Sherman, 2006. "Why Do IPO Auctions Fail?," NBER Working Papers 12151, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Government Bonds; Corporate Bonds; Auctions; Posted-Price Selling; Costly Information;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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