TAILIEUCHUNG - Why Government Bonds are sold by Auction and Corporate Bonds by Posted-Price Selling

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. | Working Paper Series iilllllFINRISK National Centre of Competence in Research Financial Valuation and Risk Management National Centre of Competence in Research Financial Valuation and Risk Management Working Paper No. 95 Why Government Bonds are sold by Auction and Corporate Bonds by Posted-Price Selling Michel A. Habib Alexandre Ziegler First version October 2002 Current version June 2003 This research has been carried out within the NCCR FINRISK project on Conceptual Issues in Financial Risk Management . Die Nationalen Forschungsschwerpunkte NFS Sind ein Fdrderinstrument des Schwelzerischen Nationalfonds. Les Poles de recherche nationaux PRN sont un instrument d encouragement du Fonds national Suisse. The National Centres of Competence in Research NCCR are a research instrument of the Swiss National Science Foundation. HSUH SCHWEIZERISCHER NATIONALFONDS Fonds national SUISSE Swiss National Science Foundation WHY GOVERNMENT BONDS ARE SOLD BY AUCTION AND CORPORATE BONDS BY POSTED-PRICE SELLING Michel A. Habib Alexandre Ziegler First version October 2002 Current version June 24 2003 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. JEL Nos. D44 G30. Keywords Government Bonds Corporate Bonds Auctions Posted-Price Selling Costly Information. Swiss Banking Institute University of Zurich .

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