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Optimal Financing and Disclosure

Author

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  • Martin Szydlowski

    (Department of Finance, Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455)

Abstract
I study an entrepreneur who finances a project with uncertain cash flows and who jointly chooses the disclosure and financing policies. In the Bayesian persuasion framework, I show that it is optimal to truthfully reveal whether the project’s cash flows are above a threshold. This class of threshold policies is optimal for any prior belief, monotone security, and increasing utility function of the entrepreneur. I characterize how the disclosure threshold depends on the underlying security, the prior, and the cost of investment. The financing choice of the entrepreneur is determined by a new trade-off between the likelihood of persuading investors and relinquishing cash flow rights. Absent further frictions, the optimal security is indeterminate. If there is adverse selection after the entrepreneur has disclosed information, the unique outcome is a pooling equilibrium in which the entrepreneur pledges the entire cash flow.

Suggested Citation

  • Martin Szydlowski, 2021. "Optimal Financing and Disclosure," Management Science, INFORMS, vol. 67(1), pages 436-454, January.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:1:p:436-454
    DOI: 10.1287/mnsc.2019.3462
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    References listed on IDEAS

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    Cited by:

    1. Thomas Mariotti & Nikolaus Schweizer & Nora Szech & Jonas von Wangenheim, 2023. "Information Nudges and Self-Control," Management Science, INFORMS, vol. 69(4), pages 2182-2197, April.
    2. Ricardo Alonso & Odilon Câmara, 2024. "Organizing Data Analytics," Management Science, INFORMS, vol. 70(5), pages 3123-3143, May.
    3. Yang, Jiawei & Li, Yuanyu & Fang, Lei, 2023. "Financing capacity planning with environmental considerations: A non-parametric analysis," Omega, Elsevier, vol. 118(C).
    4. Geng, Sen & Guan, Menglong, 2023. "Trustworthy by design," Games and Economic Behavior, Elsevier, vol. 141(C), pages 70-87.
    5. Zheng, Shiyuan & Jia, Rongwen & Shang, Wen-Long & Fu, Xiaowen & Wang, Kun, 2023. "Promote transport facility Resilience: Persuasion or Subsidy?," Transportation Research Part A: Policy and Practice, Elsevier, vol. 176(C).

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