Year: 2024
Type: article
Abstract: ABSTRACT We study an economy with financial frictions in which a regulator designs a test that reveals outside information about a firm's quality to investors. The firm can also disclose verifiable inside information about its quality. We show that the regulator optimally aims for “public speech and private silence,” which is achieved with tests that give insiders an incentive to stay quiet. We fully characterize optimal tests by developing tools for Bayesian persuasion with incentive constraints, and use these results to derive novel guidance for the design of bank stress tests, as well as benchmarks for socially optimal corporate credit ratings.
Source: The Journal of Finance
DOI: 10.1111/jofi.13360
Authors: DANIEL QUIGLEY, ANSGAR WALTHER
Institutions: University of Oxford, Imperial College London
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W4399516735