Abstract
An investor with limited attention resources demands information about the types of her portfolio firms before investing. The firms strategically supply good news and withhold bad news. The investor may press companies to reveal more information with an attention cost. Because benefit to attention is convex, the investor will choose to optimally focus on a subset of firms and acquire full information while giving up learning the rest. Firms in the scrutinized subset are with low investigation costs and high Expected Value of Perfect Information (EVPI) and always receive efficient investments. The other firms are invested in the most inefficiently and present maximum asymmetry in information transparency. The result rationalizes the use of convertible debt as a socially optimal financing instrument for private firms. It can be applied to analyze a range of investment relationships, such as between a VC and start-ups or an LP and GPs.
| Original language | English |
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| Publication status | Published - 20 Nov 2021 |
| Externally published | Yes |