Essays on Refinancing Existing Financial Commitments under Asymmetric Information

Refinancing existing financial obligations constitutes a core function of modern financial systems. However, refinancing remains inherently fragile when informational frictions distort valuation, contracting, and risk-sharing. This thesis investigates how such frictions generate inefficiencies and examines how contract design can restore efficiency.

The thesis comprises three essays, each examining distinct yet related mechanisms. Chapter 2 analyses refinancing through asset sales, referred to as stored liquidity, in secondary markets under adverse selection. When asset quality is privately observed, resale prices become sensitive to information, resulting in endogenous liquidity risk and belief-driven market freezes. A hybrid put–call contract mitigates this fragility by enabling credible ex ante commitment to liquidity provision, thereby restoring constrained efficiency.

Chapter 3 examines refinancing through standard debt contracts under asymmetric information regarding exposure to aggregate risk. Adverse selection leads to inefficient pooling equilibria, in which negative-NPV projects are refinanced, distorting risk premia and generating endogenous market risk. A two-tranche contract that conditions continued liquidity access on repayment induces separation and enhances welfare.

Chapter 4 investigates refinancing under moral hazard, emphasising the roles of collateral, debt maturity, and callable long-term debt in disciplining risk-taking while preserving investment efficiency.

Overall, refinancing inefficiencies stem from a limited contract space. Expanding contract design offers a unified mechanism to stabilise refinancing under asymmetric information.