Asymmetries of information in financial markets with applications to debt renegotiation and financial certification
This thesis investigates a number of issues caused by informational asymmetries between firms and investors. It looks at two situations where problems arise because of asymmetric information, and examines possible solutions, and presents one case where asymmetric information is the solution to a problem. The first situation developed in chapter two provides a theoretical explanation based on reputational concerns for why certification intermediaries like rating agencies may exhibit excess sensitivity to the business cycle and for differences in ratings across agencies. It also analyses how competition in this industry affects the behaviour of these intermediaries and how this depends on reputational disparities among the different competitors. Chapter three looks at the impact of auditor rotation on the gathering and disclosure of information about projects taking into account that longer auditor tenures can generate substantial savings in information collection costs but also make auditors more willing to preserve future expected rents and private benefits. It also shows that the regulation of auditing procedures becomes less relevant if accounting transparency increases. In contrast with the previous two cases, the next chapter finds that co-ordination failures among small creditors during debt renegotiation can be mitigated by the presence of a large and more informed creditor or by a voting requirement. It examines how the strength of these effects depends on the relative precision of private information of the small and large creditors and provides a rationale for a diversified capital structure based on the informational role that some creditors might have in case of financial distress.