This dissertation explores the applications of information economics in finance. How does an entrepreneur raise capital from investors with heterogeneous priors? The first chapter shows that when a secondary market exists, a price bubble arises and provides an incentive for the entrepreneur to manipulate investors’ beliefs through strategic communication. Under mild conditions, the amount of information disclosed decreases in disagreement. Without a secondary market, the price bubble vanishes, and the entrepreneur discloses more information. This chapter also discusses applications to emerging capital-raising methods, in particular initial coin offerings, and the regulatory implications for policymakers.
In general, a regulator’s commitment power is necessary for implementing the optimal transparency policy in the financial system. The literature points out that lack of commitment power leads to excess opacity if investors additionally observe a sufficiently precise signal. Instead, the second chapter shows that an equilibrium featuring excess transparency always exists and survives natural refinements under certain conditions. Moreover, the optimal transparency policy and if the regulator needs commitment power to implement it are sensitive to the exogenous information structure
