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Asset Securitization and Asymmetric Information



We analyze the incentives for asset securitization that flow from informational asymmetries within a corporation. Within the framework of “hidden-action” asymmetries, securitization of those cash flows that are relatively insensitive to managerial effort leaves critical incentive devices more high powered and more focused on cash flows that matter. In addition, asset securitization exchanges a stream of future cash inflows for a lump-sum cash inflow, which enhances monitoring and control of management expenditures. Within the “hidden-information” framework, asset securitization can be explained by asymmetric information (1) between insiders and outside investors about the value of nonsecuritized assets or (2) between insiders and outsider investors about the value of securitized assets. In both hidden-information theories, asset securitization is driven by the propensity of the market to allocate assets to investors who are best informed about asset values.

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