reallocation and learning over the business cycle abstract this paper shows how cyclical aggregate shocks can stimulate structural reallocation activities which in turn amplify the effect of the shock it analyses the informational aspects of restructuring activities and their interplay with aggregate shocks a model is developed in which production units are uncertain about the value of staying in the market and learn about it over time in a bayesian fashion in addition to their own private assessment they can also learn from observing other units decisions given that adjusting is costly each unit has an incentive to delay action and wait for other players to act in order to make a better informed decision if delay is more costly in a downturn a negative aggregate shock can break the inertia and induce the most pessimistic agents to exit the information released by such actions will induce more action thus generating a burst in restructuring activities that reinforces the initial effect of the aggregate shock this process of information accumulation and revelation offers both a powerful amplification mechanism of relatively modest aggregate shocks and a potential explanation of why restructuring tends to be concentrated in recessions

does corporate governance influence earnings management in latin american markets although us and european research has documented improvement in earnings quality associated with corporate governance characteristics the situation in latin america is questionable given the business environment in which firms operate which is characterized by controlling family ownership and weak legal protection the purpose of this study is to examine the relation between the internal mechanisms of corporate governance and earnings management measured by discretionary accrual we use a sample of listed latin american non financial companies from the period 2006 2009 our results show how in the latin american context the role of external directors is limited and that boards which meet more frequently take a more active position in the monitoring of insiders so showing a lower use of manipulative practices in addition we find a non linear relation between insider ownership and discretionary accruals also pointing to the fact that ownership concentration may be a manipulative practices constrictor mechanism only when the ownership of main shareholders is moderate the findings have important policy implications since this is to the best of our knowledge the first study to analyze the relation between the effectiveness of the government and the earnings management behavior as policy implications we document how when a country implements controls aimed at reducing corruption strengthening the rule of law or improving the effectiveness of government this leads to a reduction in firm earnings management

clearly irrational financial market behavior evidence from the early exercise of exchange traded stock options this paper analyzes the early exercise of exchange traded options by different classes of investors over the 1996 to 1999 period a large number of exercises are identified as clearly irrational without invoking any model of market equilibrium customers of discount brokers and customers of full service brokers both engage in a significant number of irrational exercises while traders at large investment houses exhibit no irrational early exercise behavior rational and irrational exercise is triggered for discount and full service customers by the underlying stock price attaining its highest level over the past year and by high returns on the underlying stock it is well known that in the absence of market frictions it is irrational to exercise american call options early except in some circumstances just before the underlying stock goes ex dividend even in the presence of market frictions it is possible to identify without the imposition of any model of market equilibrium call exercises that are clearly irrational in this paper we employ a previously unavailable data set to analyze the rationality of early exercises of chicago board option exchange cboe calls over the 1996 to 1999 period by customers of discount brokers discount customers customers of full service brokers full service customers and traders at large investment houses trading for their firms own accounts firm proprietary traders our first main finding is that there are a large number of early exercises that can be definitively identified as irrational and irrational exercise activity is not evenly distributed across the investor classes discount customers and full ser

psychological factors and stock option exercise we investigate stock option exercise decisions by over 50 000 employees at seven corporations controlling for economic factors psychological factors influence exercise consistent with psychological models of beliefs employees exercise in response to stock price trends exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons consistent with psychological models of values that include reference points employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year

motivations for aid to developing countries abstract this paper attempts to identify the underlying principles of aid allocation and particularly the balance of motivations as between the needs of recipient countries and the interests of donor countries two alternative models are fitted by cross country regressions to bilateral and multilateral aid flows to some 80 developing countries in 1969 1970 and 1978 1980 the first recipient need model assumes that all aid is given to compensate for shortfalls in domestic resources this model provides a reasonable explanation for the distribution of multilateral aid but it is clearly not applicable for bilateral aid flows the second donor interest model assumes that all aid serves only donor interests defined to cover political security investment and trade interests this model gives generally good explanations of bilateral aid but is a poor fit for multilateral aid the relative importance of the various donor interests differs sharply among donors the paper ends with an analysis of the shift in the balance of aid over the 1970s towards the recipient need element and with a reference to the sharp change in policy in the 1980s towards increasing emphasis on donor interest aid

sources procedures and microeconomic effects of innovation fabio arcangeli paul david frank engelman christopher freeman massimo moggi richard nelson luigi orsenigo nathan rosenberg michele salvati g n von tunzelman two anonymous referees and the participants at the meeting of the committee on distribution growth and technical progress of the italian national research council cnr rome november 16 1985 have helped with various redraftings a particularly grateful acknowledgment is for the insightful and patient help of moses abramovitz this work has been undertaken at the science policy research unit spru university of sussex as part of the research program of the designated research centre sponsored by the economic and social research council esrc earlier support to the research that led to this paper by the italian national research council cnr is also gratefully acknowledged the statistical research has been undertaken with the assistance of stephano brioschi ilaria fornari and giovannu prennushi

serial correlation in management earnings forecast errors we examine whether management earnings forecast errors exhibit serial correlation and how analysts understand the serial correlation property of management forecast errors mfes mfes should not exhibit serial correlation if managers efficiently process information in prior forecast errors and truthfully convey their earnings expectations through management forecasts however for long horizon management forecasts of annual earnings we find significantly positive serial correlation in mfes and sample self selection does not seem to drive this phenomenon further analyses suggest that managers unintentional information processing bias contributes to this positive serial correlation analysts anticipate the intertemporal persistence of mfes but underestimate the persistence level when reacting to management forecasts our findings have implications for market participants who rely on management forecasts to form earnings expectations and also shed light on the efficiency of managerial decision making

science dependence of technologies evidence from inventions and their inventors abstract articulating a compelling economic rationale to justify investments in research by definition furthest removed from direct immediate economic benefit is perhaps one of chief challenges of r d managers policy makers and science analysts in the years ahead although several innovation studies and surveys have provided some convincing empirical evidence of impacts and benefits of research to technical progress there is still an urgent need for comprehensive models reliable data and analytical tools to describe and monitor links between r d and industrial innovation in more detail as for the role of scientific and engineering research in the innovation process this paper reports on the findings of a novel methodology to increase our understanding of the contribution of research efforts to successful technical inventions the approach is based on a nation wide mail survey amongst inventors working in the corporate sector and the public research sector in the netherlands the inventors inside information regarding their patented inventions and related technological innovations on the market provided a range of quantitative data on the importance of the underpinning research activities statistical models attempting to explain the degree of science dependence of the inventions identify a range of relevant variables covering the inventor s own capabilities and previous r d achievements external information sources as well as the inventor s r d environment in general some 20 of the private sector innovations turned out to be partially based on public sector research furthermore citations in patents referring to basic research literature were found to be invalid indictors of a technology s science dependence

voluntary disclosures and analyst feedback we study the resource allocation role of voluntary disclosures when feedback from financial markets is potentially useful to managers in undertaking value maximizing actions managers weigh the short term price implications of disclosure against the long term efficiency gains due to feedback while financial analysts strategically produce information the model can explain why managers disclose bad information e g grim outlook that reduces the stock price and why prices respond more strongly to bad news relative to good news we find that not all firms enjoy the same quality of feedback and that feedback by itself does not induce more disclosure but less

insiders sales under rule 10b5 1 plans and meeting or beating earnings expectations we find that firms with insider sales executed under rule 10b5 1 plans exhibit a higher likelihood of meeting or beating analysts earnings expectations mbe this relation between mbe and plan sales is more pronounced for the plan sales of chief executive officers ceos and chief financial officers cfos and is nonexistent for other key insiders the market reactions to firms that successfully meet or beat expectations are relatively positive compared with their peers that fail to do so one interpretation of our results is that ceos and cfos who sell under these plans may be more likely to engage in strategic behavior to meet or beat expectations in an effort to maximize their proceeds from plan sales however readers should exercise caution in making inferences because the potential presence of limit order transactions makes it difficult to unambiguously determine the direction of causality of the relation we document this paper was accepted by mary barth accounting

insiders incentives for asymmetric disclosure and firm specific information flows abstract recent research suggests that insiders incentives for capturing cash flows affect price formation process in which insiders are inclined to withhold good news and to accelerate the release of bad news jin and myers 2006 we investigate whether insiders incentives for private control benefit proxied by control ownership wedge affect firm specific return characteristics we find that control ownership wedge is negatively related to the likelihood of positive return jumps and positively related to the extent of asymmetric market reaction to good news rather than to bad news overall our results support the notion that corporate insiders increase opaqueness and withhold good news in order to capture unexpected cash flow

patents as indicators of corporate technological strength abstract quantitative indicators of the technological strengths of individual companies would be an important addition to the financial and economic data used in competitor assessments merger acquisition analyses investment decisions and corporate planning and management this paper examines the links between corporate patent and patent citation data and several other indicators of corporate performance changes in sales and profits research and development budgets scientific productivity and expert opinions of company technological strength the study covers 17 us pharmaceutical companies for which financial r d and expert opinion data were readily available for these pharmaceutical companies it was found that the patent data are an excellent indicator of overall corporate technological strength with 1 an overall correlation of 0 82 between expert opinion of pharmaceutical company technical strength and the number of us patents granted to the companies and 2 correlations in the general range of 0 6 to 0 9 between increases in company profits and sales and both patent citation frequency and concentration of company patents within a few patent classes

some determinants of foreign aid to india 1960 1985 abstract using a unique data set of aid to india from all sources 1960 1985 we discuss the magnitude and composition of aid and present a principal components analysis of aid giving we then attempt to get at the underlying patterns and causes of aid giving using factor analytic techniques and explain the level of foreign aid by employing a partial adjustment model we find that latent motivations to classify the donor countries into four convenient groups each with different political and economic motivations we also find that the latent variables capturing the motivations of the united states western european countries eastern european countries as well as last year s aid and the balance of trade but not gdp growth are significant determinants of the level of aid

does best practice in setting executive pay in the uk encourage good behaviour we examine how uk listed companies set executive pay reviewing the implications of following best practice in corporate governance and examining how this can conflict with what shareholders and other stakeholders might perceive as good behaviour we do this by considering current governance regulation in the light of interviews with protagonists in the debate setting out the dilemmas faced by remuneration setters and showing how the processes they follow can lead to ethical conflicts

the other side of the trade off the impact of risk on executive compensation the principal agent model of executive compensation is of central importance to the modern theory of the firm and corporate governance yet the exiting empirical evidence supporting it is quite wea

the role of supplementary statements with management earnings forecasts we investigate managers decisions to supplement their firms management earnings forecasts we classify these supplementary disclosures as qualitative soft talk disclosures or verifiable forward looking statements we find that managers provide soft talk disclosures with similar frequency for good and bad news forecasts but are more likely to supplement good news forecasts with verifiable forward looking statements we examine the market response to these forecasts and find that bad news earnings forecasts are always informative but that good news forecasts are informative only when supplemented by verifiable forward looking statements supporting our argument that these statements bolster the credibility of good news forecasts

risk taking in contests and the role of carrots and sticks i introduction when individuals compete for promotions bonuses or other rewards tied to their relative performance ranking vis a vis other contestants competition is likely to drive not just work effort but where imperfect monitoring permits other choices at the contestants discretion in this article we ask how rank dependent compensation influences attitudes toward risk or the choice of variance of output when contestants have opportunities to influence this aspect of their output distribution unlike previous literature we assume that it is costly for contestants to alter the variance of output and that identical contestants simultaneously choose both the mean of their output distribution i e work effort and its variance our analysis emphasizes the importance of the number of players and symmetry or lack thereof of payoffs on contestants incentives we find that contestants will engage in risk seeking increasing the variance of their output distribution in contests among three or more players when the payoff structure offers a greater prize for ranking first than the penalty for ranking last as happens in winner take all contests if the tournament organizer or sponsor values the aggregate output of the contestants as is typically assumed in labor market tournaments this risk seeking behavior is inefficient because it is costly but does not increase the expected output however we argue that many contests such as the research and development tournaments first modeled by taylor 1995 may be characterized by an organizer who cares only or primarily about the highest output achieved by a single contestant e g the best submission received in such cases the organizer may benefit from costly risk taking among contestants we show that three payoff levels a prize to the contestant ranked first a penalty to the contestant ranked last and a common intermediate payoff to all others are sufficient to achieve any combination of effort and variance of output that the organizer wishes to induce among contestants so long as the desired output variance does not exceed that which results from a winner take all prize structure therefore the sponsor s problem can be characterized as choosing the optimal mean and variance of the output distribution given the contestants costs of influencing the mean and variance of output in this way our model provides an explanation for the importance of both carrots prizes and sticks penalties in competitive settings only through the combined use of both can a contest organizer determine the effort and the variance of output chosen by contestants and doing so is necessary to achieve optimal performance from contests since the pioneering work of lazear and rosen 1981 nalebuff and stiglitz 1983 o keeffe viscusi and zeckhauser 1984 and others rank order tournaments or contests have been used to model incentives in a variety of economic settings in particular executive compensation has frequently been modeled as a tournament in which low level executives are motivated by the prospect of climbing the corporate ladder and obtaining the large salaries attendant to top ranking executives as in rosen 1986 and bognanno 2001 similarly the behavior of investment fund managers who compete for top fund rankings has been modeled as a tournament by brown harlow and starks 1996 taylor 1995 developed a model of research tournaments in which contestants search for an innovation and the best innovation submitted to the sponsor wins a prize the distinguishing feature of a tournament or contest is that contestants are paid based on the rank of their output relative to others rather than the level of output prize levels are set in advance and competition to win generates the incentive to exert effort to increase output lazear and rosen 1981 showed that rank order tournaments can provide an efficient incentive framework in a labor market setting when workers are risk neutral

stock option grants to target ceos during private merger negotiations abstract unscheduled stock options to target chief executive officers ceos are a nontrivial phenomenon during private merger negotiations in 920 acquisition bids during 1999 2007 over 13 of targets grant them these options substitute for golden parachutes and compensate target ceos for the benefits they forfeit because of the merger targets granting unscheduled options are more likely to be acquired but they earn lower premiums consequently deal value drops by 62 for every dollar target ceos receive from unscheduled options conversely acquirers of targets offering these awards experience higher returns therefore deals involving unscheduled grants exhibit a transfer of wealth from target shareholders to bidder shareholders

growing through cycles in an infinitely lived agent economy abstract this paper extends the analysis of k matsuyama econometrica67 1999 335 347 to the case of an infinitely lived representative agent economy the economy grows endogenously through endogenous fluctuations perpetually moving back and forth between two phases in one phase there is no innovation the market structure is competitive and the economy grows solely by capital accumulation in the other phase new goods are introduced and the market structure is monopolistic in the long run both investment and innovation grow at the same rate but the economy alternates between the periods of high investment and the periods of higher innovation journal of economic literature classification numbers e32 o11

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

a liquidity based model of security design we consider the problem of the design and sale of a security backed by specified assets given access to higher return investments the issuer has an incentive to raise capital by securitizing part of these assets at the time the security is issued the issuer s or underwriter s private information regarding the payoff of the security may cause illiquidity in the form of a downward sloping demand curve for the security the severity of this illiquidity depends upon the sensitivity of the value of the issued security to the issuer s private information thus the security design problem involves a tradeoff between the retention cost of holding cash flows not included in the security design and the liquidity cost of including the cash flows and making the security design more sensitive to the issuer s private information we characterize the optimal security design in several cases we also demonstrate circumstances under which standard debt is optimal and show that the riskiness of the debt is increasing in the issuer s retention costs for assets

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

the characteristics of individual analysts forecasts in europe abstract this study investigates the determinants of financial analysts forecasts differential accuracy in 14 different european stock markets using the i b e s detail history database i find that european financial analysts forecast accuracy is positively associated with analyst firm specific experience forecast accuracy is negatively associated with the number of countries followed by analysts and the age of the forecast surprisingly i find no relationship between forecast accuracy and analysts job experience and the size of the bank employing the analyst

what fraction of stock option grants to top executives have been backdated or manipulated we estimate that 13 6 of all option grants to top executives during the period 1996 2005 were backdated or otherwise manipulated our study primarily focuses on grants that were unscheduled and at the money of which we estimate that 18 9 were manipulated the fraction is 23 0 before the new two day filing requirement took effect on august 29 2002 and 10 0 afterward for the minority of grants that are not filed within the required two day window the fraction of manipulated grants remains as high as 19 9 we further find a higher frequency of manipulation among tech firms small firms and firms with high stock price volatility in addition firms that use smaller non big five auditing firms are more likely to file their grants late finally at the firm level we estimate that 29 2 of firms manipulated grants to top executives at some point between 1996 and 2005

industry window dressing we explore a new mechanism by which investors take correlated shortcuts and present evidence that managers using sales management take advantage of these shortcuts specifically we exploit a regulatory provision wherein a firm s primary industry is determined by the highest sales segment exploiting this regulation we provide evidence that investors classify operationally nearly identical firms as starkly different depending on their placement around this sales cutoff moreover managers appear to exploit this by manipulating sales to be just over the cutoff in favorable industries further evidence suggests that managers engage in activities to realize large tangible benefits from this opportunistic action

exercise behavior valuation and the incentive effects of employee stock options abstract we use a large database on eso exercises to document characteristics of exercise behavior and calibrate a utility based model for measuring how differences in exercise behavior are manifested in option values and incentives option values and incentives computed from the model calibrations are compared to those computed from models used to value tradable options our analysis provides guidance to both academics and practitioners about how differences in exercise behavior and model choice affect measures of eso values and incentives and underscores the importance of gaining a thorough understanding of the underlying economic forces that affect the behavior of eso holders

backdating executive stock options an ex ante valuation abstract when backdating executive stock options esos the exercise price is set in favor of the recipient executive relative to a non backdated benchmark we find an ex ante upper bound for the cost of backdating to shrink from 10 to about 3 7 as a consequence of the regime change represented by the sarbanes oxley act sox we frame the backdating behavior as a compound exotic option considering both simple and extended models of the underlying eso in the latter case we draw on the analytical eso models of sircar and xiong 2007 post sox we use a longstaff schwartz inspired least squares monte carlo approach

policy selectivity forgone debt and donor behavior in africa authors assess the dynamics behind the high net resource transfers by donors and creditors to sub saharan african countries analyzing the determinants of overall net transfers for a panel of 37 recipient countries in 1978 98 authors find that country policies mattered little donors especially bilateral donors actually made greater transfers to countries with high debt largely owed to multilateral creditors when policies were bad authors conclude that comprehensive debt relief has the potential though not the certainty to restore selectivity in support of good policies that would make development assistance more effective going forward and increase public support in donor countries

sectoral patterns of technical change towards a taxonomy and a theory abstract the purpose of the paper is to describe and explain sectoral patterns of technical change as revealed by data on about 2000 significant innovations in britain since 1945 most technological knowledge turns out not to be information that is generally applicable and easily reproducible but specific to firms and applications cumulative in development and varied amongst sectors in source and direction innovating firms principally in electronics and chemicals are relatively big and they develop innovations over a wide range of specific product groups within their principal sector but relatively few outside firms principally in mechanical and instrument engineering are relatively small and specialised and they exist in symbiosis with large firms in scale intensive sectors like metal manufacture and vehicles who make a significant contribution to their own process technology in textile firms on the other hand most process innovations come from suppliers these characteristics and variations can be classified in a three part taxonomy based on firms 1 supplier dominated 2 production intensive 3 science based they can be explained by sources of technology requirements of users and possibilities for appropriation this explanation has implications for our understanding of the sources and directions of technical change firms diversification behaviour the dynamic relationship between technology and industrial structure and the formation of technological skills and advantages at the level of the firm the region and the country

the role of insider influence in mutual to stock conversions using a sample of 347 demutualizing thrifts from 1991 to 2004 we show that the level of inside participation is not a traditional signal of firm performance we conclude that unanticipated inside participation reflects the incentives of insiders to reduce the size of the offer to influence the level of expected initial public offer ipo returns we find unanticipated inside participation is related to lower offer size and higher initial returns but we do not find a relationship between inside participation and post ipo performance

the timing of option repricing we investigate whether executive stock option repricings are systematically timed to coincide with favorable movements in the company s stock price for a sample of 236 repricing events we observe sharp increases in stock price in the 20 day period following the repricing date in addition repricing dates tend to either precede the release of good news or follow the release of bad news in the quarterly earnings announcements since information about stock option repricing is not generally released to the public around the repricing date these findings suggest that ceos opportunistically manage the timing of the option repricing date

are stock options grants to ceos of stagnant firms fair and justified prior research has examined several ethical questions related to executive compensation the issues that have received most attention are whether executives pay is fair and justified by performance since more recent studies show that stock options grants constitute the single largest component in executive compensation we examine the relations of these grants to economic determinants and corporate governance for firms in the stagnant stage of their lifecycle we find that on average stock options grants comprise a significant portion of annual ceo compensation 26 4 for stagnant firms we also find that economic corporate governance factors explain less or more of the cross sectional variation in stock options grants for stagnant firms than for growth firms furthermore we document lower pay performance sensitivity i e weaker incentive alignment and no improvement in future firm performance from past stock options grants to ceos of stagnant firms in particular our study provides empirical evidence on some inefficiencies associated with stock options grants to ceos of low potential stagnant firms a long standing concern of business ethics researchers moriarty 2005 nichols and subramaniam 2001 perel 2003 our results also provide support for the corporate governance reforms discussed in matsumura and shin 2005 especially those proposed provisions that curtail the power of ceos in the governance of firms

irresponsible lending with a better informed lender we present a simple model of personal finance in which an incumbent lender has an information advantage vis a vis both potential competitors and households in order to extract more consumer surplus a lender with sufficient market power may engage in irresponsible lending approving credit even if this is knowingly against a household s best interest unless rival lenders are equally well informed competition may reduce welfare this holds in particular if less informed rivals can free ride on the incumbent s superior screening ability this article proposes a new framework for analysing household or consumer lending using its past experience with borrowers in the same local area or borrowers facing similar economic conditions a sophisticated lender may often have a better estimate of a household s default probability than the household itself i derive the conditions where such information asymmetry can lead to irresponsible or too aggressive lending in which case credit is approved even though this is knowingly against a household s best interest admittedly the more standard approach is to assume that borrowers represent the better informed party while we do not want to dismiss the importance of borrower adverse selection the presumption that sophisticated and experienced lenders can estimate the default probability better than individual borrowers may be particularly suitable if borrowers are households individual households may not have statistically accurate information about the likelihood of say losing their job in an economic downturn or of incurring large medical bills in the future both of which may cause them to default on a loan on the other hand we do not presume that households own estimates are biased on average i borrow the assumption of informed lending from inderst and m ller 2006 where a lender is better informed about the expected cash flow from a newly financed project my current analysis is tailored instead towards household finance and my focus is on whether too aggressive lending can occur in equilibrium this focus is motivated by the particular attention that policy makers have given to this issue for instance in the uk various reports and taskforces on consumer lending practices and more generally on the surge of household debt have brought up

market valuation of employee stock options this study investigates whether investors incorporate the value of a firm s outstanding employee stock options into its stock price i estimate the outstanding options value for a sample of firms for which outstanding fixed options exceed 5 of outstanding common shares in 1988 i find a negative correlation between the value of outstanding options and a firm s share price the correlation is stronger i for the option s intrinsic value than for the option s time value ii for options that are later in their vesting stage than earlier in their vesting stage and iii for large firms than for small firms in addition the fasb s method for calculating compensation expense has no explanatory power in the presence of this paper s calculation of the options value

double boom cycles and the comeback of science push and market pull abstract the discussion about the course of technology development began in the 1960s with linear science push and market pull models and received a decisive impetus in the 1980s with the introduction of non linear recursive models the effect of these non linear characteristics on the chronological development of a field is less clear in particular as to science based technology several authors discuss such developments of technologies but with a focus on market activities some studies point to cyclical instead of logistic developments so that a closer look at the underlying mechanisms suggests itself for an improved understanding a clear distinction between science technology and market activities proves to be important a long term analysis of the development of science based technology fields and related science fields leads to the discovery of typical double boom cycles of technology where the first boom can be associated with science technology push and the second boom with market pull but with feedback loops and non linear characteristics the scientific development shows two growth periods with an intermittent stagnation period where the turning points precede the referring technology developments indicating a relevant impact of science on technology in contrast a cyclical development of the market activities in parallel to technology is not visible

ceo stock option awards and the timing of corporate voluntary disclosures abstract we investigate whether ceos manage the timing of their voluntary disclosures around stock option awards we conjecture that ceos manage investors expectations around award dates by delaying good news and rushing forward bad news for a sample of 2 039 ceo option awards by 572 firms with fixed award schedules we document changes in share prices and analyst earnings forecasts around option awards that are consistent with our conjecture we also provide more direct evidence based on management earnings forecasts issued prior to award dates our findings suggest that ceos make opportunistic voluntary disclosure decisions that maximize their stock option compensation

on the use and abuse of stock option grants recently a significant number of companies have come under public and regulatory scrutiny for backdating stock option grants this article discusses factors that influenced the dramatic increase in stock option compensation and summarizes the academic research that led to the discovery of backdating the information gained in this early stage of investigation provides some insight into the number of companies and potential costs of option backdating increased transparency and timely disclosure should curtail grant date manipulation but the credibility of the disclosure system requires active enforcement of the rules and standards investors need accurate complete disclosures of executive compensation to hold boards of directors accountable for executive compensation

optimal long term financial contracting we develop an agency model of financial contracting we derive long term debt a line of credit and equity as optimal securities capturing the debt coupon and maturity the interest rate and limits on the credit line inside versus outside equity dividend policy and capital structure dynamics the optimal debt equity ratio is history dependent but debt and credit line terms are independent of the amount financed and in some cases the severity of the agency problem in our model the agent can divert cash flows we also consider settings in which the agent undertakes hidden effort or can control cash flow risk

the effect of issuing biased earnings forecasts on analysts access to management and survival this study offers evidence on the earnings forecast bias analysts use to please firm management and the associated benefits they obtain from issuing such biased forecasts in the years prior to regulation fair disclosure analysts who issue initial optimistic earnings forecasts followed by pessimistic earnings forecasts before the earnings announcement produce more accurate earnings forecasts and are less likely to be fired by their employers the effect of such biased earnings forecasts on forecast accuracy and firing is stronger for analysts who follow firms with heavy insider selling and hard to predict earnings the above results hold regardless of whether a brokerage firm has investment banking business or not these results are consistent with the hypothesis that analysts use biased earnings forecasts to curry favor with firm management in order to obtain better access to management s private information

does option compensation increase managerial risk appetite this paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls under the manager s optimal policy the option ends up either deep in or deep out of the money as the asset value goes to zero volatility goes to infinity however the option compensation does not strictly lead to greater risk seeking sometimes the manager s optimal volatility is less with the option than it would be if he were trading his own account furthermore giving the manager more options causes him to reduce volatility managers with convex compensation schemes play an important role in financial markets this paper solves for the optimal dynamic investment policy for a risk averse manager paid with a call option on the assets he controls the paper focuses on how the option compensation impacts the manager s appetite for risk when he cannot hedge the option position on one hand the convexity of the option makes the manager shun payoffs that are likely to be near the money under the optimal policy the manager either significantly outperforms his benchmark or else incurs severe losses furthermore in examples of optimal trading strategies asset volatility goes to infinity as asset value goes to zero yet option compensation does not strictly lead to greater risk seeking as asset value grows large or if the evaluation date is far away the manager moderates asset risk for example if the manager has constant relative risk aversion crra asset volatility converges to the merton constant as asset value goes to infinity in some situations the manager actually chooses a lower asset volatility than he would if he were investing on his own because the leverage inherent in his option magnifies his exposure to the asset volatility in addition with all constant or decreasing absolute risk averse utility functions from the hyperbolic absolute risk averse hara class giving the manager more options causes him to reduce asset volatility in the crra case for example the manager targets a fixed volatility for his personal

information production dilution costs and optimal security design abstract we investigate the problem of a firm wishing to finance a project by issuing securities under asymmetric information we find that when outside investors can produce noisy information on the firm s quality the degree of information asymmetry resulting in equilibrium is endogenous and depends on the information sensitivity of the security issued thus in contrast to the prediction of the pecking order theory see e g myers and majluf j financial econom 13 1984 187 a security with low sensitivity to private information such as debt does not always dominate one with high information sensitivity such as equity a firm s preference for equity rather than debt depends on the costs of information production the precision of the information production technology and the extent of the information asymmetry we also study the optimal security design problem and find that depending on the cost and precision of the information production technology risky debt or a composite security with a convex payoff emerges as optimal securities

does local financial development matter we study the effects of differences in local financial development within an integrated financial market we construct a new indicator of financial development by estimating a regional effect on the probability that ceteris paribus a household is shut off from the credit market by using this indicator we find that financial development enhances the probability an individual starts his own business favors entry of new firms increases competition and promotes growth as predicted by theory these effects are weaker for larger firms which can more easily raise funds outside of the local area these effects are present even when we instrument our indicator with the structure of the local banking markets in 1936 which because of regulatory reasons affected the supply of credit in the following 50 years overall the results suggest local financial development is an important determinant of the economic success of an area even in an environment where there are no frictions to capital movements

optimality of debt under flexible information acquisition we study the optimality of debt through the interaction between se curity design and information acquisition an impatient seller designs an asset backed security and a buyer decides whether to buy it to provide liquidity facing dierent securities the buyer has incentives to acquire in formation from dierent aspects of the fundamental which in turn aects security design speci cally the buyer bene ts from information acqui sition at the expense of the seller through adverse selection the seller hence deliberately designs the security to induce the buyer to acquire the information least harmful to the seller s interest since securities can be designed in arbitrary ways the resulting incentive to acquire information is very exible thus we introduce exible information acquisition to capture this interaction we show that debt is uniquely optimal com pared with the security design literature we neither assume monotonicity of the feasible securities nor impose various distributional assumptions on the fundamental or information structures fixed aggregate cash ow and homogeneous information cost are two key factors driving the results jel d86 d82 g32

financial contracting theory meets the real world an empirical analysis of venture capital contracts we compare the characteristics of real world financial contracts to their counterparts in financial contracting theory we do so by studying the actual contracts between venture capitalists vcs and entrepreneurs the distinguishing characteristic of vc financings is that they allow vcs to separately allocate cash flow rights board rights voting rights liquidation rights and other control rights we describe and measure these rights we then interpret our results in relation to existing financial contracting theories we also describe the interrelation and the evolution across financing rounds of the different rights query 1 query 2

the dating game do managers designate option grant dates to increase their compensation we provide evidence of two variants of a dating game that entails picking a grant date ex post that is after the board s compensation decision is made back dating picking a date before the board decision date and forward dating waiting after the board decision date to observe the stock price behavior consistent with back dating we find stock return behavior around the grant date to be positively related to reporting lag in the promptly reported sample we find stock return behavior and the pattern of reporting lags consistent with forward dating our calculations show that managers can obtain economically significant benefits by playing the dating game

catalyzing aid the imf and donor behavior in aid allocation the international monetary fund imf has often asserted that its programs encourage aid by signaling policy credibility commonly referred to as aid catalysis our study investigates this claim for sector specific aid and for bilateral and multilateral donors using data on 136 recipient countries for the 1986 2009 period we employ a two part quantitative model to match the donor decision making process consisting of a first stage recipient selection equation and a second stage allocation equation on selected recipients we find strong support that imf programs catalyze aid on aggregate but the evidence varies across different types of aid aid catalysis is stronger and more robust in sectors linked to the imf s core competency areas namely debt related relief and general budget support but weaker and less robust for infrastructure production multisector and humanitarian aid and non existent for health and education across donors imf programs are associated with increases in aid by countries with larger voting shares in the imf such as the united states and japan but less so by countries with few votes or for multilateral agencies this finding is consistent with research in international political economy arguing that the imf s powerful stakeholders drive the organization s decisions and policies taken together our findings emphasize the imf s multi dimensional impact on the global development agenda an erstwhile overlooked factor in studies of aid allocation while refuting the purported positive effects of imf programs on aid for social policy

the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

strategic liquidity supply and security design we study how securities and issuance mechanisms can be designed to mitigate the adverse impact of market imperfections on liquidity in our model asset owners seek to obtain liquidity by selling claims contingent on privately observed future cash flows liquidity suppliers can be competitive or strategic in the optimal trading mechanism associated to an arbitrary given security issuers with low cash flows sell their entire holdings of the security while issuers with high cash flows are typically excluded from trade by designing the security optimally issuers can avoid exclusion altogether we show that the optimal security is debt because of its low informational sensitivity debt mitigates the adverse selection problem furthermore by pooling all issuers with high cash flows debt also reduces the ability of a monopolistic liquidity supplier to exclude them from trade in order to better extract rents from issuers with lower cash flows

agreements between firms and the technological life cycle model evidence from information technologies abstract contrarily to most previous contributions which have addressed the issue of cooperative agreements essentially in a perspective of comparative statics in this paper a model is proposed that relies on the technological trajectory notion suggested by evolutionary theories and emphasizes the relevance of the technological and market dynamics in explaining why and to what extent firms have recourse to agreements in particular it is claimed that the propensity of firms towards collaborative ventures and the characteristics of the cooperation depend upon the phase of the technological life cycle of the industry branch in which the cooperation takes place based on a cross sectional analysis of 45 industry branches in the information technology industrial system the paper also provides empirical evidence supporting the argument that the propensity towards agreements and the nature of the agreements concluded do change during the technological life cycle to this end it takes advantage of the arpa database developed at the polytechnic of milan and containing detailed information on over 2 000 agreements concluded in the 1980 1986 period all over the world in the semiconductor data processing and telecommunications industries

estimating aid allocation criteria with panel data in 1990 the net amount of economic aid or official development assistance to all recipients from all multilateral and bilateral sources was about 62 billion an amount that exceeded the gdps of greece and portugal despite the size of this yearly transfer there has been no rigors modeling and estimation of the criteria by which it occurs as a result there is little agreement about the extent to which oda is allocated according to the needs of the recipient countries the purpose of this paper is to develop a rigorous theoretical model of oda allocation that can be used to provide consistent estimates of the importance of recipient needs copyright 1994 by royal economic society

unsystematic security price movements management earnings forecasts and revisions in consensus analyst earnings forecasts empirical evidence suggests that information about a firm s future earnings prospects is important to investors griffin 1976 givoly and lakonishok 1979 1980 and imhoff and lobo 1984 reported statistically significant abnormal stock returns before at and after announcements of analyst earnings forecast revisions in addition imhoff and lobo documented positive correlation between the magnitudes of the forecast revisions and the abnormal returns these findings are consistent with the hypothesis that investors find analyst forecast revisions informative another source of information about future earnings is projections from corporate officials several studies have found unsystematic stock price changes prior to and or immediately surrounding the public release of management earnings forecasts e g foster 1973 nichols and tsay 1979 patell 1976 jaggi 1978 penman 1980 and waymire 1984 the conclusion from this research is that management forecasts also convey information to investors

staying in business abstract the paper analyses factors which help a small entrepreneurial firm to stay in business the time scale for the analysis is three years 1985 1988 the main issue that the paper is concerned with is the role of market and financial variables primary source data are used an estimated probit model indicates that for this sample product range and gearing are the key maket and financial variables respectively the greater the product range and the lower the gearing ceteris paribus the better the chances of staying in business

debt relief for low income countries is it effective and efficient in recent years religious bodies campaigning groups and parts of the media have made a strong moral case for debt relief accusing creditors of imposing an excessive burden of debt on low income countries and thereby forcing them to cut back in other areas of government expenditure such as education and health with deleterious effects on poverty reduction and economic growth the case for debt relief is also made from the other side of the political spectrum most notably in the recent report of the international financial institution advisory commission sponsored by the us congress the meltzer report which amongst other measures called for complete debt cancellation by the imf and other ifis

aid and debt relief in africa have they been substitutes or complements summary much attention has been paid to helping economies in sub saharan africa ssa to achieve the millennium development goals mdgs the conventional instruments for providing assistance have been foreign aid disbursements and debt relief but have debt relief initiatives complemented or substituted for other aid has debt relief been additional this paper examines the evolving relationship between debt relief and other foreign aid in ssa using recently constructed and improved data estimating a model of aid allocation for 42 ssa countries using panel data for 1988 2006 it finds that the relationships between debt debt relief aid and resource transfers have changed over time this paper interprets how policy changes may have modified the underlying relationship between aid and debt relief

impact of firm performance expectations on ceo turnover and replacement decisions abstract our analysis suggests that boards focus on deviation from expected performance rather than performance alone in making the ceo turnover decision especially when there is agreement less dispersion among analysts about the firm s earnings forecast or there are a large number of analysts following the firm in addition our results suggest that boards are more likely to appoint a ceo that will change firm policies and strategies i e an outsider when forecasted 5 year eps growth is low and there is greater uncertainty more dispersion among analysts about the firm s long term forecasts

what insiders know about future earnings and how they use it evidence from insider trades abstract this paper provides evidence that insiders possess and trade upon knowledge of specific and economically significant forthcoming accounting disclosures as long as 2 years prior to the disclosure stock sales by insiders increase three to nine quarters prior to a break in a string of consecutive increases in quarterly earnings insider stock sales are greater for growth firms before a longer period of declining earnings and when the earnings decline at the break is greater consistent with avoiding an established legal jeopardy there is little abnormal selling in the two quarters immediately prior to the break

insider trading stock return volatility and the option market s pricing of the information content of insider trading abstract we find strong evidence that net insider selling is positively associated with future stock return volatility consistent with insider selling increasing outside investors uncertainty the positive effect of net insider selling is significantly stronger when the volatility is measured around the earnings announcement apparently option prices do not fully reflect the information content of insider trading for future volatility more specifically we find no evidence that option traders adjust the implied volatility for the insider trading effect in a timely manner consequently net insider selling is significantly associated with future option straddle returns and delta neutral returns

optimal exercise prices for executive stock options although exercise prices for executive stock options can be set either below or above the grant date market price in practice virtually all options are granted at the money we offer an economic rationale for this apparent puzzle by showing that pay to performance incentives for risk averse undiversified executives are typically maximized by setting exercise prices at or near the grant date market price we provide an operationally useful alternative to black scholes 1973 for the purpose of both valuing executive stock options and measuring the incentives created by options our framework has implications not only for exercise price policies but also for indexed options option repricings exchanges of cash for stock based compensation and the design of bonus plans

private information in executive stock option trades evidence of insider trading in the uk uk executives stock option exercises and associated sell decisions are motivated by private inside information executives use their inside information to lock in short term gains and to sell stock acquired prior to negative abnormal stock returns this informed trading is robust to the alternative factors that might motivate the exercise of executive stock options including option moneyness and value of exercise we suggest that the disparity in informed trading between us and uk executives option trades is related to important differences in the proportion of executive remuneration linked to options the regulation of options and the taxation of option gains

bias and the commitment to disclosure this paper studies the propensity of firms to commit to disclose information that is subsequently biased in the presence of other firms also issuing potentially biased information an important aspect of such an analysis is the fact that firms can choose whether to disclose or withhold information we show that allowing the number of disclosed reports to be endogenous introduces a countervailing force to some of the empirical predictions from the prior literature for example we find that as more firms issue reports or as the correlation across firms cash flows increases the firm biases its report less however when we treat firms disclosure choices as endogenous we show that the number of firms that commit to disclose decreases as the correlation across these cash flows increases and this in turn offsets the direct effect of the correlation on bias this paper was accepted by mary barth accounting

did high debts distort loan and grant allocation to ida countries summary we examine the allocation of net loans net transfers and grants to ida countries over the period 1982 2008 focusing on the role of debt and debt sustainability in the decisions of multilateral and bilateral donors we find no evidence of defensive lending but strong evidence of defensive granting a significant negative reaction of net loans to the debt ratio indeed characterizes the decisions of both multilateral and bilateral creditors the impact of lower loans on the budget of debtor countries is however accommodated through higher grants in addition to debt relief these findings are consistent with a substitution of grants for loans and with the new approach to debt sustainability but question the efficiency and selectivity of foreign aid

composition of r d and technological cycles abstract this paper investigates the existence of technological cycles that arise endogenously from certain tradeoffs between research and development inherent in the technological features of r d production it analyzes the composition of r d expenditures and models the associated internal structure and dynamics of the innovation process explicitly the model includes externalities and cumulative aspects of r d processes the discussion is initially developed in a deterministic setting for both the first best and the market cases the dynamics leading to optimal cycles are fully explored for specific examples results are given with regard to 1 i level of research investment 2 ii stability of steady states and cycles and 3 iii amplitude of cycles extensions to a stochastic setting are also presented

managerial incentives risk aversion and debt we investigate the risk choices of risk averse ceos following recent theoretical work we expect ceo risk aversion to be more pronounced in firms with high leverage or high default probability we find that the ceos of these firms reduce firm risk even in the presence of strong risk taking incentives our results are robust to controls for the sensitivity of ceo wealth to stock price changes firm risk determinants the endogenous feedback effects of firm risk on ceo incentives unobserved firm and market effects and debt governance the impact of ceo risk aversion is economically significant

informed lending and security design we examine the role of security design when lenders make inefficient accept or reject decisions after screening projects lenders may be either too conservative in which case they reject positive npv projects or too aggressive in which case they accept negative npv projects in the first case the uniquely optimal security is debt in the second case it is levered equity in equilibrium profitable projects that are relatively likely to break even are financed with debt while less profitable projects are financed with equity highly profitable projects are financed by uninformed arm slength lenders professional lenders have specialized expertise in screening projects unlike the typical entrepreneur to whom they lend they have been exposed to a wide variety of projects in the past professional lenders have experienced loan officers and analysts who know precisely what information is relevant how to treat soft information such as management quality and how to weigh the various pieces of information in making a forecast of the project s cash flows and default risk this paper examines how securities should be optimally designed when lenders make inefficient accept or reject decisions after screening projects in our model screening generates an informative albeit private signal about the project s profitability high signals indicate a positive net present value npv and low signals indicate a negative npv where the project s npv is increasing

does stock return predictability affect eso fair value abstract executive stock options esos are modified american options that cannot be valued using standard methods with a few exceptions the literature has discussed the eso fair value by assuming unpredictable stock returns which are not supported by the available empirical evidence in this paper we obtain the fair value of american esos when stock returns are predictable and specifically driven by the trending ornstein uhlenbeck process of lo and wang 1995 we solve the executive s portfolio allocation problem for a simple buy and hold strategy when his wealth can be distributed between a risk free asset and a market portfolio this problem is jointly solved with the executive s optimal exercise policy we find that executives tend to wait longer the higher the predictability independently of the composition of executive s asset menu we have also analyzed the implications under the fas123r proposals for the eso fair value and found that even for low autocorrelations there is a meaningful mispricing when unpredictable returns are erroneously assumed

extreme screening policies abstract we show that a lender often experiences increasing marginal returns to screening in a standard setting where the lender decides how intensively to screen the projects of prospective borrowers the increasing marginal returns imply that even small changes in industry parameters can produce large changes in equilibrium screening intensity in particular a small reduction in the expected return from borrowers projects can produce a pronounced increase in the screening of prospective borrowers with substantial corresponding welfare effects

pricing executive stock options under employment shocks abstract we obtain explicit expressions for the subjective objective and market value of perpetual executive stock options esos under exogenous employment shocks driven by an independent poisson process previously we obtain the executive s optimal exercise policy from the subjective valuation that is necessary for the objective one or fair value the perpetual eso is compared with the true finite maturity eso finding that the approximation is reasonably good to illustrate the usefulness of the objective valuation for accounting purposes we analyze the statistical distribution of the fair value when there is uncertainty about the employment shock intensity finally the role of esos in the design of executives incentives is also discussed

curse or blessing has the impact of debt relief lived up to expectations a review of the effects of the multilateral debt relief initiatives for low income countries as the multilateral debt relief initiatives draw to a close this article reviews the impacts of debt relief to low income countries lics building on both the theoretical and empirical literature

threshold nonlinearities and asymmetric endogenous business cycles abstract this paper presents a model of endogenous business cycles in the presence of knowledge spillovers and a time to build restriction there are two key assumptions that characterize the model i the payoff to each firm depends on the aggregate state of knowledge and ii the innovation of a project is time consuming under those assumptions a simple structure is shown to be described by a piecewise linear difference equation with a discontinuity we show that the resulting dynamics generated by such a dynamical system leads to an asymmetric periodic cycle of arbitrary period that appears to switch repeatedly between different regimes

discussion of compensation policy and discretionary disclosure abstract nagar et al j accounting econom 34 2003 posits that stock based compensation motivates managers to increase public disclosure of their private information the hypothesis is intriguing and new to the literature and the findings are consistent with it however developing the hypothesis depends on some unsupported assumptions and the link between the hypothesis and the empirical evidence is indirect raising concerns about the validity of the study s inferences about the effects on disclosure of stock based compensation

sectoral systems of innovation and production the concept sectoral system of innovation and production provides a multidimensional integrated and dynamic view of sectors it is proposed that a sectoral system is a set of products and the set of agents carrying out market and non market interactions for the creation production and sale of those products a sectoral systems has a specific knowledge base technologies inputs and demand agents are individuals and organizations at various levels of aggregation they interact through processes of communication exchange co operation competition and command and these interactions are shaped by institutions a sectoral system undergoes change and transformation through the co evolution of its various elements 2002 elsevier science b v all rights reserved

discussion of information distribution within firms evidence from stock option exercises abstract huddart and lang j accounting econom 34 2003 documents that higher level of employee option exercise during a particular month is associated with lower returns in subsequent months suggesting employees exploit private information in their exercise decisions while the paper extends the insider trading literature that has focused on top executives a number of inconsistencies with prior studies remain unresolved moreover the study does not establish a direct link to the private information employees supposedly exploit establishing such a link is warranted here in the light of the surprising finding that exercises by senior employees are no more informative than those by lower rank employees

effect of investor speculation on earnings management this paper considers how the presence of a speculative investor who bets on a firm s future earnings report affects how the firm s management manipulates that report we examine the influence of the speculator s information on earnings management behavior quality of reported earnings and stock price efficiency we also provide predictions for and interpretations of short window event studies and long window association studies

is there a link between executive equity incentives and accounting fraud we compare executive equity incentives of firms accused of accounting fraud by the securities and exchange commission sec during the period 1996 2003 with two samples of firms not accused of fraud we measure equity incentives in a variety of ways and employ a battery of empirical tests we find no consistent evidence that executive equity incentives are associated with fraud these results stand in contrast to assertions by policy makers that incentives from stock based compensation and the resulting equity holdings increase the likelihood of accounting fraud

too much of a good incentive the case of executive stock options abstract using a utility maximization framework i show that the incentive to increase stock price does not always increase as more options are granted keeping the total cost of his compensation fixed granting more options creates greater incentives to increase stock price only if option wealth does not exceed a certain fraction of total wealth beyond this critical level granting more options actually reduces incentive effects and becomes counterproductive in addition stock options also create incentive to reduce increase idiosyncratic systematic risk these incentive effects are sensitive to the choice of exercise price

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

optimal design of securities under asymmetric information 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