Expected return given uncertain recovery rate and information asymmetry

Abstract

This study discusses the expected rate of return with an uncertain recovery rate in both asymmetric and full information economies. Potential project default risk reflects the uncertain recovery rate, which influences the net profit of financial institutions, depositors and securitization investors. The expected rate of return is derived for a particular probability of information asymmetry. This work also considers the determinants of minimum expected recovery rate in case of non-bankruptcy.

Keywords:

• Expected return
• information asymmetry
• recovery rate
• financial institution