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This paper documents the emergence of a large bank loan market in the absence of contracting institutions: the trusted assistant loan market in 19th century China. These loans were legally unenforceable, one-shot loans to poor scholars that funded the costs of assuming lucrative administrative appointments offering ample opportunities for corruption. The trusted assistant loan’s distinguishing feature was a legally unenforceable stipulation that the borrower incorporate an agent of the creditor into his administrative cadre. We model the enforcement of these loans through expertise leverage and test the model’s predictions using data from officials’ diaries and a bank loan book. JEL classifications:G21, O16, D86

We study contests in which contestants are homogeneous and have convex effort costs. Increasing contest competitiveness, by making prizes more unequal, scaling up the competition, or adding new contestants, always discourages effort. These results have significant implications: although often criticized as evidence of laxity or cronyism, muting competition (e.g., adopting softer grading curves or less high-powered promotion systems) can both reduce inequality and increase output. Holding promotion contests at the division level rather than the firm level can boost employees’ effort. Our results are also consistent with personnel policies that feature egalitarian pay systems and dismissal of worst-performing employees.

Uncompetitive contests for grades, promotions, retention, and job assignments, which feature lax standards and limited candidate pools, are often criticized for being unmeritocratic. We show that, when contestants are strategic, lax standards and exclusivity can make selection more meritocratic. When many contestants compete for a few promotions, strategic contestants adopt high-risk strategies. Risk-taking reduces the correlation between performance and ability. Through reducing the effects of risk-taking, “Peter-Principle” promotion policies, which entail promoting some contestants that are unlikely to be worthy, can increase the overall correlation between selection and ability, and thus further the goal of meritocratic selection.

We examine the consequences of pay activism (shareholder democracy) in a model where some forms of compensation (discretionary pay) are unrelated to performance, yet maximize shareholder welfare. Pay is set by a board that can either be aligned with shareholders or with management. This board is armed with multi-dimensional precise information regarding both managerial preferences and the firm’s investment opportunity set while shareholders only receive imprecise signals regarding the firm’s prospects. A shareholder oriented board sets corporate investment policy and discretionary pay to maximize shareholder payoff. A manager oriented board can uses pay and investment policy to enrich management. This causes shareholders, who are uninformed about board type, to view the use of discretionary pay with a degree of “suspicion.” Relative to a charter-based pay policy that either insulates boards from shareholder scrutiny, or imposes ex ante restrictions on discretionary pay, democracy has the advantage that shareholder suspicion, which incorporates their information from a non-verifiable and non-contractible signals, imposes signal-contingent restrictions on compensation policy. However, shareholder suspicion and the threat of sanctions also cause boards to further distort pay and investment policy to reduce suspicion. Simulations over our parameter space suggest that ex ante shareholder welfare is higher under democracy relative to charter-based policy for only 2.29% of the parameter draws.

Online Appendix A to "Security Design for Asset Acquisitions" shows that seller debt securities can be optimal security designs when informed sellers, rather than uninformed buyers, make acquisition offers, and when acquirers are cash constrained. In contrast, acquirer overconfidence and seller private information are essential components of our analysis of seller debt financing. Online Appendix B to "Security Design for Asset Acquisition"' shows that the ratio condition, Assumption 4, is satisfied by all standard textbook distributions (supported by the non-negative real line) whenever the standard monotone likelihood ratio conditions (Assumptions 1 and 2) of security design are satisfied. The distributions families considered are Chi-Squared, Exponential, Gamma, Gompertz, Half Normal, Lognormal, and Weibull. General sufficient conditions for the satisfaction of Assumption 5 are also developed. The paper is available at https://ssrn.com/abstract=3731086.

We model corporate governance in a world with competitive securities markets as well as markets for corporate assets. We show that varying the liquidity and opacity of corporate assets, the vitality of the market for corporate control, and the costs of enforcing shareholder rights to cash flows leads to a plethora of institutional designs. When asset liquidity is high, shareholder rights are enforced through the option to liquidate as in a mutual fund. When the opacity of corporate assets is relatively high and asset liquidity is relatively low, firms will eschew reliance on board monitoring and instead rely on shareholder activism. An increase in the cost of ownership concentration, by increasing the inefficiency of shareholder activism, will increase the reliance on board activism and decrease the reliance on CEO compensation. Decreases in the cost of enforcement of shareholder rights and the opacity of corporate assets, and increased raider activity further strengthen the preference for activist boards.

We posit that screening IPOs requires specialized labor which, in the short run, is in fixed supply. Hence, a sudden increase in demand for IPO financing increases the compensation of IPO screening labor. Increased compensation results in reduced screening which encourages sub-marginal firms to enter the IPO market, further increasing the demand for screening labor and thus its compensation. The model's conclusions are consistent with empirical findings of increased underpricing during hot markets, positive correlation between issue volume and underpricing, negative correlation between issue volume and information production, and with tipping points between hot and cold markets characterized by discontinuous jumps in volume, underpricing, and issue quality. Finally, the model makes sharp and so far untested predictions relating IPO market conditions both to the fundamental values of IPO firms and to the returns to investment banks and investment banking labor.

We propose a security design model in which a potential acquirer approaches a firm with a value-add plan. The target has a single owner, who possesses private information: he knows whether his firm is compatible with the plan, or not. The seller agrees the acquirer will add value but not as much as what the acquirer expects. Although the acquirer can choose any monotone limited liability security to offer along with cash, we show that, under general conditions, if a security is employed, it takes the form of non-recourse junior debt provided by the seller.

In this chapter, we consider the role of personality traits in shaping the behavior of financial actors. We consider the promise of using personality to predict financial behavior. Personality is perhaps the ultimate “exogenous” predictive variable—stable throughout the lifetime of individuals and substantially heritable. At the same time, personality traits have demonstrated predictive power for agent actions. However, there are a number of inherent obstacles to incorporating personality into the standard economic model of financial decision making. We suggest some approaches to overcoming these obstacles.

We characterize the relationship between talent, luck, and successful performance in highly competitive environments. We show that in many plausible settings, world beating performance is a rather weak signal of underlying ability. For many standard statistical distributions, competition cannot identify talent, i.e., as the number of competitors increases without bound, the probability that the best performer is talented is bounded away from one. When performance equals ability plus Normally distributed noise, competition can identify talent. However, the probability that the best performer is talented increases so slowly with increased competition that, for plausible signal/noise ratios drawn, for example, from the empirical literature on mutual fund performance, confident attribution of talent to the best performer is impossible under any practically conceivable scale of competition. Increased competition need not even favor talent, i.e., increase the probability that the best performer is talented. We provide sufficient conditions both for competition favoring talent and for competition favoring luck. Using these conditions, we show that, in a fairly natural setting---a single-shot forecasting contest where a forecaster's performance is measured by her accuracy and a forecaster's ability is measured by the precision of her Normally distributed information signal, competition favors luck. In other words, increasing the number of competing forecasters always reduces the probability that the most accurate forecaster is talented. In forecasting contests, besting one rival in a two-shot contest provides a stronger signal of ability than topping an arbitrarily large number of rivals in a single-shot contest.

We show that stock liquidity increases the propensity of firms to raise debt capital. The positive effect of liquidity on a debt issuance propensity is much stronger in firms with greater default risk. The effect of liquidity on the cost of debt capital is much larger than its effect on the cost of equity capital. These results are consistent with standard theoretical frameworks for financing under uncertainty and asymmetric information: by facilitating information production, stock liquidity reduces insider and market uncertainty about future firm cash flows, thereby lowering the default risk and thus the costs of debt financing.

We show that seasoned equity offerings (SEOs), in which secondary share-offering size greatly exceeds market share turnover, provide a unique opportunity for stock price manipulation by speculators holding restricted shares. The proposed new theory is consistent with several puzzling empirical findings, for example, the positive abnormal stock return between announcement and issuance and the long-term poorer returns of issuing firms after SEOs. The manipulation is characterized by a strong buying in the secondary market prior to the issuance, which drives up the market price and thereby the offering price of restricted shares, and a large amount of liquidation of restricted shares in the SEO. Our model predicts that favorable market reactions with speculator's manipulative intent after SEO announcement could occur, which naturally leads to a successful issuance and over-investment based long-term underperformance after SEO.

Agents frequently compete for both relative-performance rewards — mutual fund inflows generated by rankings, executive promotions and compensation based on peer comparisons, rank-dependent social status — and absolute-performance rewards — bonus payments for meeting targets, performance fees based on “high-water marks,” wealth from portfolio returns. It is well known that bonus compensation can engender risk-taking. However, we show that introducing bonus rewards into rank-based competitions can reduce risk-taking through the “Atalanta effect”: bonus rewards distract superior competitors from rank competition, thereby leveling the playing field and reducing the need for weak competitors to adopt high downside-risk strategies.

We model the repair of damaged corporate reputations through organizational structure reform. In a rational-choice framework our model explains the effects of the emergence and growth of the professional reputation-crisis management industry. The model produces two key conclusions: (a) Although, ex post, reputation repair can increase firm value, ex ante, the option to repair reputation dilutes the incentive to maintain reputation. (b) Separating ownership and control by delegating management to professionals can ameliorate this dilution. An experimental implementation of the model supports these conclusions and shows that they are robust to behavioral deviations from rational-choice behavior.

This paper considers lending to finance projects in a setting where repayment enforcement appears impossible. The loan was illegal and thus legally unenforceable. Creditors were incapable of applying private coercion to force repayment. Borrowers lacked both collateral and reputation capital. Project cash flows were unobservable. The projects were the acquisition of Imperial administrative posts by scholars in nineteenth century Qing China. The lending mechanism was the “trusted-assistant loan.” Our model of trusted-assistant lending shows that it is a renegotiation-proof implementation of efficient state dependent financing. Empirical analysis of officials’ diaries and bank records shows that the employment of trusted-assistant lending and the performance of trusted-assistant loans conforms roughly with the model’s predictions.

We study contests in which contestants are homogeneous and have convex effort costs. Increasing contest competitiveness, by making prizes more unequal, scaling up the competition, or adding new contestants, always discourages effort. These results have significant implications: although often criticized as evidence of laxity or cronyism, muting competition (e.g., adopting softer grading curves or less high-powered promotion systems) can both reduce inequality and increase output. Holding promotion contests at division level rather than firm level can boost employees' effort. Our results are also consistent with personnel policies which feature egalitarian pay systems and dismissal of worst-performing employees.

This paper develops a new theory of the capital structure of parent–subsidiary organizations based on legal-system arbitrage: the capital structure of parent–subsidiary organizations is chosen to minimize the agency costs generated by selective renegotiation of claims written on the component legal entities. We show that optimal mixes of parent-subsidiary–level financing minimize the default premia associated with the organization’s overall financing package by equating the marginal enforceability of debt contracts written at the parent and subsidiary levels. The enforceability of creditor claims depends not only on the legal regime but also on the size of the debt claims and the liquidation value of the firm’s assets. Small claims written under a weak creditor rights regime may be more enforceable than large claims written under a regime with strong creditor protection. Thus, all optimal mixes involve some borrowing at the subsidiary level even if the subsidiary legal regime features weaker creditor protection than the parent regime. However, the mix between parent and subsidiary financing tilts toward the regime that features stronger creditor protection. This paper was accepted by Itay Goldstein, finance.

This study compares the announcement effects of dual class recapitalization across insider holdings. We find positive announcement effects for the lowest insider holding firms and negative announcement effects for the firms whose insider holdings is near 50%. The evidence supports the hypothesis that there is an optimal level of insider holdings in the firm.

In this paper we show, in an incomplete contracts framework that combines asymmetric information and moral hazard, that by permitting insiders to trade on personal account the equilibrium level of output can be increased and shareholder welfare can be improved. There are two reasons for this. First, insider trading impounds information regarding the costs and benefits of effort and perk consumption into asset prices, which allows shareholders to choose more efficient portfolio allocations. Second, allowing insider trading can induce managers to increase their stake in the firm beyond that obtained through bargaining with shareholders. This effect leads to a reduction in managerial perk consumption and/or increased managerial effort. Insider trading can also be costly for shareholders' intermediate range of monitoring costs and project difficulty because, in such cases, the efforts of managers are quite sensitive to the exact level of fractional shareownership, which managers can endogenously change if they are able to trade on personal account. Interestingly, when monitoring and effort costs are low, managers may prefer restrictions on their ability to trade as such restrictions will force shareholders to offer them a larger fraction of output.

This paper examines whether golden parachute adoptions in the banking industry during the eighties aligned the interests of CEOs with those of regulators and or shareholders. Our results provide evidence supporting concerns expressed by regulators: that boards of directors behaved opportunistically by adopting golden parachutes prior to large bank failures in order to exploit the FDIC guarantee. Parachute adoption was correlated with poor performance ex ante and ex post. Moreover, adoption of parachutes virtually ceased when the FDIC guarantee was withdrawn by FDICIA.

This article investigates investor activism when a number of investors are capable of expending resources to exercise a role in corporate governance. Strategic investors make monitoring decisions and trade in anonymous ?nancial markets with other agents whose trades are motivated by liquidity considerations. In this setting,a core group of monitoring investors emerges endogenously to curtail managerial opportunism. These core activist investors pursue activist policies and engage in heavy trading on both the buy and the sell sides of the market. In addition,a fringe group of monitoring investors, who are somewhat active and trade only on the buy side,ma y emerge. Although the smallest investors are passive,there is no monotonic relationship between shareholdings and activism. In fact,among those investors who choose to monitor with positive probability, those with smaller holdings are the most active. In addition to characterizing the emergence of monitoring activity in the presence of numerous potential activist investors,we also develop some comparative statics. Some of these comparative statics are counterintuitive from the perspective of models that fail to endogenize both security market structure and investor activism. For example,it is shown that increasing the size of the shareholdings controlled by informed,strategic investors may reduce bid-ask spreads.

This paper investigates the relation between stock liquidity and firm performance. We find that firms with liquid stocks have better firm performance as measured by the market-to-book ratio. This result holds even when we include industry or firm fixed effects, control for idiosyncratic risk, control for endogenous liquidity with instrumental variables, or use alternative measures of liquidity. To identify the causal effect of liquidity on firm performance, we study an exogenous shock to liquidity---the decimalization of stock trading---and document that the increase in liquidity around decimalization improved firm performance. We next investigate the causes of liquidity’s beneficial effect and find support for liquidity enhancing performance by increasing the information content of market prices, and strengthening the incentive effects of performance based compensation contracts. We find no evidence that liquidity enhances blockholder intervention. Finally, momentum trading, analyst coverage, investor overreaction and liquidity’s valuation effects do not appear to drive our results.

A firm must decide what security to sell to raise external capital to finance a profitable investment opportunity. There is ex ante asymmetry of information regarding the probability distribution of cash flow generated by the investment. In this setting, we derive necessary and sufficient conditions for a security to be optimal (uniquely optimal, that is, for pooling at this security to be an (the unique) equilibrium outcome. Using these conditions we show that the debt contract is (uniquely) optimal if and only if cash flows are ordered by (strict conditional stochastic dominance. Finally, we derive an equivalence relationship between optimal security designs and designs that minimize mispricing. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

We analyze a distressed firm indebted to many creditors. The firm's owners have the option of choosing the sequence of restructuring negotiations with the creditors. We show that sequencing flexibility is beneficial to firm owners, and that the optimal sequencing of restructuring negotiations involves exploiting the firm's liabilities to some creditors so as to moderate the demands of others. Moderately distressed firms will eschew renegotiations with creditors in strong bargaining positions. Severely distressed firms will extract concessions from all creditors. In this case, owners can gain if they can credibly commit to conditional restructuring agreements that link the concessions of one creditor to concessions by others.

We model experimentally the governance of an institution. The optimal management of this institution depends on the information possessed by insiders. However, insiders, whose interests are not aligned with the interests of the institution, may choose to use their information to further personal rather than institutional ends. Researchers (e.g., Palfrey 1990) and the business press have both argued that multiagent mechanisms, which inject trustworthy but uninformed "watchdog" agents into the governance process and impose penalties for conflicting recommendations, can implement institutionally preferred outcomes. Our laboratory experiments strongly support this conclusion. In the experimental treatments in which watchdog agents were included, the intuitionally preferred allocation was implemented in the vast majority of cases. Surprisingly, implementation occurred even in the absence of penalties for conflicting recommendations.

We examine competition between groups of producers when consumers prefer costly `ethical' production technologies. Consumers are unable to identify or monitor production technologies. Producers can freeride on their group's `reputation' by substituting cheaper `unethical' technologies. When an ethical technology is Pareto-optimal, social pressures within competing producer groups can ensure long-run dominance of groups relying most heavily on the ethical technology. Even if social pressures cannot support the choice of the ethical technology in the long run, competition between producer groups can increase the average level of adoption of the ethical technology for an arbitrarily long period of time.

In this paper, we examine acquisitions of two financially distressed retailers-Federated's takeover of Macy's, and Zell Chilmark's takeover of Carter Hawley Hale. In both cases the raider purchased some of the target's outstanding debt to launch its takeover attempt. These debt purchases appear to have been facilitated by two salient factors-the raider's expertise in dealing with distressed firm restructuring and the ability of the raider to acquire a large blockholding of debt. Our analysis indicates that, when these factors are present, it is optimal for a raider to initiate a takeover of a distressed firm through purchasing a block of the firm's debt. Target bondholder reaction will be favorable whereas shareholder reaction may be either favorable or unfavorable.

In a rational expectations framework under the assumption that the stock market is segmented because of legal restrictions, it is demonstrated that the returns of large firm stocks are predictors of small firm stock returns. Empirical tests supporting this prediction are also presented.

This study reviews papers from the Eastern Finance Association's Symposium on Corporate Finance, Incentives, and Strategy. I identify the common themes underlying these papers and place the studies in the broader context of contemporary academic finance research. Further, I discuss new directions for future research in corporate finance that are suggested in these studies.

This paper documents the short- and long-term balance sheet effect of cash flows. We show that cash savings in the short run and debt reduction in both the short and the long run account for a substantial fraction of cash flow use. Although, in the long run, investment exhibits substantial sensitivity to cash flows, investment does not absorb the entire cash flow shock. In fact, the tighter the financial constraints, the smaller the fraction of cash flow absorbed by investment and the more by leverage reduction. Firms stage their response to increases in cash flow, delaying investment while building up cash stocks and reducing leverage. These results suggest that much of the short-run economic effect of cash flow shocks to the corporate sector may be channeled into the corporate debt market rather than the capital goods market, especially when financing constraints tighten.

We model long-run firm performance, management compensation, and corporate governance in a dynamic, nonstationary world. Many features of governance and compensation that have caused consternation among commentators arise naturally in this dynamic setting, even though boards are rational and managers are powerless. Compensation changes depend on changes in the evolution of a latent state variable outside the manager's control. Board passivity is positively correlated with both the value of management compensation and the firm's good fortune. Managerial opportunism tends to follow sudden reversals of good fortune. Moreover, managerial private benefits, by increasing managers' stake in the long-run viability of the firm, may actually ameliorate agency conflicts. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

In this article, the authors show that the evolution of managerial entrenchment can distort investment horizons. Both myopic and hypermetropic distortions can arise. The direction of these distortions is determined by the locus of control and their pervasiveness by the degree of management entrenchment. Myopic distortions occur when shareholders directly determine investment policy. Hypermetropic distortions occur when management sets investment policy. The inherent hypermetropic bias of managers is mitigated by front-loaded compensation packages and pension plans tied to short-run performance. These distortions in investment horizons may have implications for the allocation of corporate control. Copyright 1997 by University of Chicago Press.

This paper considers a problem in which an agent is hired to manage a capital investment and subsequently receives private information regarding the productivity of the capital investment. The capital manager must decide whether to invest capital supplied by the firm (the principal), or to divert these investment funds to perquisite consumption. If the manager decides to invest, the manager must then select the level of operating efficiency (productivity) of the capital investment, this latter choice being unobservable and constrained by the (maximal) productivity of the investment. In this setting we demonstrate that the optimal employment contract, from the perspective of the firm hiring the manager, is the contract whichminimizes the dependence of the manager's compensation on firm output. This contract pays the manager a fixed wage whenever output from the investment exceeds the wage and provides the manager with all of the projects rents whenever output falls below this level. Thus, we provide a setting in which fixed wage contracts are the optimal incentive contract even when agents are risk neutral and contracts can be costlessly written on future output.

Investigates futures market efficiency. Anomalies in asset prices; Test for fads in futures markets; Data description; Price effects; Trading rule tests; Volume effects..

This paper considers the team management of mutual funds, fund manager ability, performance, and holdings. We find evidence suggesting there is a positive relation between performance and team management concurrent with a negative relation between managerial ability and the use of team management. Consistent with the notion that the team management suppresses portfolio eccentricity and leads to more generic trading strategies, thereby both increasing returns and making returns less informative of fund manager ability, we also find that team management is associated with less idiosyncratic portfolio holdings and a greater loading on large capitalization, low book-to-market, and momentum stocks.

In competitions for rank-based rewards, how does the structure of rewards affect risk-taking? We answer this question in a framework where, subject only to a mean-performance constraint, contestants compete for rank-based "prizes" by choosing random performance levels. We derive the unique equilibrium of this game and provide a comprehensive analysis of the relation between the equilibrium performance distribution -- including modality, symmetry, tail behavior, dispersion, and skewness -- and the contest structure. Increasing the real gain inequality of prizes, adding contestants, or scaling up contest size increases performance dispersion but not necessarily skewness while convexifying the prize schedule increases both dispersion and skewness.The supplement to this paper: http://ssrn.com/abstract=2747503

In this document, we demonstrate that the risk-taking contest game studied in "Skewing the odds: Taking risks for rank-based rewards" has no asymmetric equilibria and, hence, the symmetric equilibrium identified there is, in fact, the unique equilibrium.The paper, "Skewing the odds: Taking risks for rank-based rewards," can be found here: http://ssrn.com/abstract=2747496.

We model the effect of external financing on a firm's ability to maintain a reputation for high-quality production. Producing high quality is first best. Defecting to low quality is tempting because it lowers current costs while revenue remains unchanged because consumers and outside investors cannot immediately observe the defection. However, defection to low quality impairs the firm's reputation, which lowers cash flows and inhibits production over the long term. Financing via short-term claims discourages defection to low quality because the gains from defection are mostly captured by outside investors through an increase in the value of their claims. Therefore, if the firm relies on short-term external financing, it is more likely to produce over the long run, produce high-quality goods, and enjoy high profitability. The aggregate results from a laboratory experiment generally accord with these predictions. This paper was accepted by Brad Barber, finance.

Electricity market design in the United States is increasingly dominated by locational marginal pricing (LMP) of energy and transmission. LMP markets are typically coupled with periodic auctions of financial transmission rights (FTRs) to hedge transmission price risks. While LMP designs offer considerable advantages, forward price discovery in these markets requires participants to form efficient expectations on spot congestion price differences. In this paper, we examine trends in the efficiency of one of the early LMP markets, the New York Independent System Operator (NYISO), analyzing a panel data set of over 9000 contracts over a six-year period beginning September 2000. We show that NYISO FTR markets were inefficient in their early years, but that market participants learned to predict forward prices and thus efficiency improved for FTRs not solely within the New York City/Long Island sub-region. FTRs within this sub-region, which has a number of special characteristics, remain relatively inefficient.

We provide evidence that a personality trait, aggression, has a first-order effect on group financial decision making. In a laboratory experiment on group portfolio choice, highly aggressive subjects (measured by a standard psychology test) were much more likely to recommend risky investment strategies consistent with their own personal information, regardless of the information received by other group members. Outside of this group context, aggression had no effect on subject behavior. Thus, our aggression measure appears to capture an aggressive disposition, which seeks to dominate group decisions, rather than simply reflect risk attitudes or cognitive biases.

This paper considers optimal compensation for a CEO who is entrusted with administering corporate assets honestly. Optimal compensation designs maximize integrity at minimum cost. These designs are very "low powered," i.e., while specifying a lower bound for performance and increasing pay with performance, they increase compensation at a rapidly decreasing rate. Thus, integrity considerations engender optimal compensation packages that closely resemble the very pervasive 80/120 bonus plans, exactly the sort of compensation that Jensen (2003) argues should compromise integrity. Under optimal designs, expected compensation increases linearly with firm size, and increases in the market/book ratio. Moreover, given optimal compensation, CEO asset diversion is limited to high market-to-book firms that have received negative productivity shocks. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

This paper investigates the use of debtor-in-possession (DIP) financing by firms reorganizing under Chapter 11. A model is developed in which there is asymmetric information between the creditors of a distressed firm and its management. In this context, it is demonstrated that reliance on DIP financing resolves informational asymmetries regarding the true economic value of distressed firms. The model's conclusions are empirically supported in the paper and by results of extant research. The signaling role of DIP financing is evidenced both by the positive stock price reaction to DIP announcements and the fact that firms employing DIP financing have more successful reorganizations.

This paper derives necessary and sufficient conditions for stochastic and monotone likelihood ratio dominance conditioned on the selection of one random prospect over another when that prospects realized value is higher. One of these conditions, geometric dominance, imposes simple, intuitive restrictions on compared distributions analogous to the monotone likelihood ordering. Using geometric dominance, we determine when selection preserves and reverses the unconditional stochastic order of random prospects. We then illustrate the power and applicability of selection-conditioned stochastic orders for resolving economic problems that hinge on selection through a series of illustrative applications.

Why do portfolio managers actively manage their stock portfolios? The finance literature suggests the importance of financial incentives, effort, information and career concerns. We suggest that personality can also be a factor. We perform an experiment with industry experts. The experiment documents that, in a group decision setting, subjects with high aggression, measured by a standard psychology test, were much more likely to deviate from market tracking. In an individual decision setting, these same subject’s behavior was not significantly affected by aggressiveness. This result suggests that, in group settings, personality, rather than cognitive biases, might be the most important source of behavioral deviations from the rational choice paradigm.

This article models, and experimentally simulates, the free-rider problem in a takeover when the raider has the option to “resolicit,” that is, to make a new offer after an offer has been rejected. In theory, the option to resolicit, by lowering offer credibility, increases the dissipative losses associated with free riding. The outcomes of our experiment support this prediction and produce losses from free riding even higher than theoretically predicted. These dissipation losses reduce raider gains to less than 3% of synergy value of the acquisition

We analyze a bargaining game in which one party, called the buyer, is the active player and has the option of choosing the sequence of negotiations with other participants, called sellers. If the negotiations are public, the sellers who are negotiated with late in the sequence are in stronger bargaining positions and are able to extract larger payoffs from the buyer. However, the total payouts to the sellers are invariant to the buyer's sequencing strategy. When the sequencing of negotiations is confidential, the situation is more complex and interesting. Equilibria exist in which the deal collapses and thus the Coase conjecture fails to hold. Also, there exist equilibria that feature deterministic negotiation sequencing and replicate the payoffs from public negotiations. More interestingly, new classes of efficient, non-dissipative equilibria emerge in which the buyer endogenously injects strategic uncertainty by randomizing over negotiation sequences. In fact, when the aggregate bargaining power of the sellers is small, equilibria featuring uniform randomization across negotiation sequences maximize the buyer's payoff. When the aggregate bargaining power of the sellers is large, uniform randomization is not optimal for the buyer, and may not even be supported by an equilibrium. In these cases, equilibria featuring fairly intricate strategies, e.g., dividing sellers into groups, uniformly randomizing within each group and randomizing asymmetrically across sequences of groups, generate higher payoff to the buyer than equilibria featuring deterministic or uniformly randomized negotiating sequences.