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on Corporate Finance |
| By: | Piero Gottardi (Dipartimento di Scienze Economiche, Università di Venezia); Ronel Elul (Federal Reserve Bank of Philadelphia) |
| Abstract: | In many countries, lenders are not permitted to use information about past defaults after a specified period of time has elapsed. We model this provision and determine conditions under which it is optimal. We develop a model in which entrepreneurs must repeatedly seek external funds to finance a sequence of risky projects under conditions of both adverse selection and moral hazard. We show that forgetting a default makes incentives worse, ex-ante, because it reduces the punishment for failure. However, following a default it is generally good to forget, because by improving an entrepreneur’s reputation, forgetting increases the incentive to exert effort to preserve this reputation. Our key result is that if agents are sufficiently patient, and low effort is not too inefficient, then the optimal law would prescribe some amount of forgetting — that is, it would not permit lenders to fully utilize past information. We also argue that forgetting must be the outcome of a regulatory intervention by the government — no lender would willingly agree to ignore information available to him. |
| Keywords: | Bankruptcy, Information, Incentives, Fresh Start |
| JEL: | D86 G33 K35 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:23_07&r=cfn |
| By: | Piero Gottardi (Dipartimento di Scienze Economiche, Università di Venezia); Alberto Bisin (Department of Economics, New York University); Adriano Rampini (Fuqua School of Business, Duke University) |
| Abstract: | Incentive compensation induces correlation between the portfolio of managers and the cash flow of the firms they manage. This correlation exposes managers to risk and hence gives them an incentive to hedge against the poor performance of their firms. We study the agency problem between shareholders and a manager when the manager can hedge his compensation using financial markets and shareholders can monitor the manager’s portfolio in order to keep him from hedging, but monitoring is costly. We find that the optimal incentive compensation and governance provisions have the following properties: (i) the manager’s portfolio is monitored only when the firm performs poorly, (ii) the manager’s compensation is more sensitive to firm performance when the cost of monitoring is higher or when hedging markets are more developed, and (iii) conditional on the firm’s performance, the manager’s compensation is lower when his portfolio is monitored, even if no hedging is revealed by monitoring. Moreover, the model suggests that the optimal level of portfolio monitoring is higher for managers of firms whose performance can be hedged more easily, such as larger firms and firms in more developed financial markets. |
| Keywords: | Executive Compensation, Incentives, Monitoring, Corporate Governance |
| JEL: | G30 D82 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:24_07&r=cfn |
| By: | Michel Boutillier; Nathalie Lévy; Valérie Oheix |
| Abstract: | We built an original database of flow of funds financial accounts in order to assess the final destination of households' financial wealth. Our method based on matrix calculation stepwise makes all financial intermediaries transparent. We reject the usual dichotomy between bankand market-based systems. The diversity of monetary and non-monetary financial intermediaries' roles includes various ways of interpenetration - consolidation in Europe, credit risk transfer techniques in the U.S. - and the lengthening of the intermediation chain. Based on the same function of transformation of indirect debt securities, it reinforces the Gurley and Shaw's unifying definition of financial intermediation. |
| Keywords: | Financial intermediation, risk management, input-output matrix, households’ wealth, bank-based systems, market-based systems, cross-sectoral activities |
| JEL: | C67 E01 E21 G2 G32 L16 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2007-22&r=cfn |
| By: | Suman Ghosh (Department of Economics, College of Business, Florida Atlantic University); Eric Van Tassel (Department of Economics, College of Business, Florida Atlantic University) |
| Abstract: | In this paper we develop a two period model of a credit market to study the interaction between a monopolistic moneylender and a subsidized microfinance institution. We assume that lenders face a moral hazard problem that is diminished as agents are able to take increased equity positions in their production projects. In this setting, we identify a range of subsidy levels for which the behavior of the moneylender complements the poverty reduction mission of the microfinance institution. We also explain why a policy of offering subsidized loans in the second period to agents who are poor due to a project failure in the prior period, does not distort agents’ incentives to work hard and save in the first period. By varying the subsidy level available to the microfinance institution we discover that for small subsidies the moneylender may be better off with the microfinance institution in the market, and that when subsidies are excessive this can harm the poverty reduction mission of the microfinance institution. |
| Keywords: | microfinance, poverty, moral hazard, contracts |
| JEL: | O12 G21 D86 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:fal:wpaper:07001&r=cfn |
| By: | Francis X. Diebold (University of Pennsylvania and NBER); Kamil Yýlmaz |
| Abstract: | Notwithstanding its impressive contributions to empirical financial economics, there remains a significant gap in the volatility literature, namely its relative neglect of the connection between macroeconomic fundamentals and asset return volatility. We progress by analyzing a broad international cross section of stock markets. We find a clear link between macroeconomic fundamentals and stock market volatilities, with volatile fundamentals translating into volatile stock markets. |
| Keywords: | Financial market, equity market, asset return, risk, variance, asset pricing |
| JEL: | G1 E0 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:0711&r=cfn |