a multiplicative model of optimal ceo incentives in market equilibrium this paper presents a unified theory of both the level and sensitivity of pay in competitive market equilibrium by embedding a moral hazard problem into a talent assignment model by considering multiplicative specifications for the ceo s utility and production functions we generate a number of different results from traditional additive models first both the ceo s low fractional ownership the jensen murphy incentives measure and its negative relationship with firm size can be quantitatively reconciled with optimal contracting and thus need not reflect rent extraction second the dollar change in wealth for a percentage change in firm value divided by annual pay is independent of firm size and therefore a desirable empirical measure of incentives third incentive pay is effective at solving agency problems with multiplicative impacts on firm value such as strategy choice however additive issues such as perk consumption are best addressed through direct monitoring jel d2 d3 g34 j3

empirical evidence on the relation between stock option compensation and risk taking abstract we examine whether executive stock options esos provide managers with incentives to invest in risky projects for a sample of oil and gas producers we examine whether the coefficient of variation of future cash flows from exploration activity our proxy for exploration risk increases with the sensitivity of the value of the ceo s options to stock return volatility eso risk incentives both eso risk incentives and exploration risk are treated as endogenous variables by adopting a simultaneous equations approach we find evidence that eso risk incentives has a positive relation with future exploration risk taking additional tests indicate that eso risk incentives exhibits a negative relation with oil price hedging in a system of equations where eso risk incentives and hedging are allowed to be endogenously determined overall our results are consistent with esos providing managers with incentives to mitigate risk related incentive problems

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

the multitask theory of state enterprise reform empirical evidence from china the degree of state ownership remains significant in the chinese economy despite more than two decades of economic reform since 1979 most of the remaining state owned enterprises soes are money losing and the few exceptional ones tend to be sheltered by government protection in selected industries yet china has been enjoying one of the most spectacular growth experiences in world history and much of the growth is driven by non state owned enterprises non soes given the poor financial performance of soes the co existence of state ownership and non state ownership in china is a puzzling phenomenon does state ownership exist solely for the benefit of politicians or has state ownership played any role in china s spectacular growth is there any rationale behind china s gradual and selective approach towards privatizing its soes what types of soes does the chinese government choose to privatize what are the consequences of privatization in this paper we offer a multitask theory of soe reform in the context of china which has predictions about the types of soes to be chosen for privatization and the results of privatization we then present empirical evidence supporting the basic premise of the theory and its predictions

sequentially optimal auctions abstract in auctions where a seller can post a reserve price but if the object fails to sell cannot commit never to attempt to resell it revenue equivalence between repeated first price and second price auctions without commitment results when the time between auctions goes to zero seller expected revenues converge to those of a static auction with no reserve price with many bidders the seller equilibrium reserve price approaches the reserve price in an optimal static auction an auction in which the simple equilibrium reserve price policy of the seller mirrors a policy commonly used by many auctioneers is computed journal of economic literature classification numbers c78 d44 d82

microstructure bluffing with nested information chakraborty and yilmaz 2004a b con sider strategic models of repeated trading by an informed insider with long lived private infor mation they show that if market makers face uncertainty about the existence of informed trades in the order flow then with sufficiently many periods of trading the insider will bluff in every equilibrium in the precise sense ruled out in albert s kyle 1985 1323 i e by first destabilizing prices with unprofitable trades made at the nth auction then recouping the losses and much more with profitable trades at future auctions by bluffing the insider adds noise to the market s inference problem and makes prices less sensitive to his trades in this note we demonstrate how the scope for profitable bluffing is enhanced by the pres ence of other rational informed traders in the

the invisible hand and the grabbing hand evidence from a survey of 105 shop owners in moscow and warsaw shows that the reliance on private protection as well as the burden of regulation and corruption are much greater in moscow the evidence suggests that the invisible hand model of government better fits the warsaw local government and the grabbing hand model is more appropriate for moscow the evidence implies that the singular focus on the speed of economic reforms to understand the success of transition is misplaced and that the quality of government may be as essential this abstract was borrowed from another version of this item

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

employee bargaining power inter firm competition and equity based compensation abstract we develop a model to illustrate that equity based compensation for non executive employees and product market decisions are related when the product market is competitive and employees have low bargaining power the unique equilibrium is for each firm s owners to offer equity based compensation to their employees in this setting equity based compensation leads to a lower wage rate which makes each firm more competitive with its rival however this unique equilibrium is a prisoner s dilemma for the firms original owners our results are consistent with several empirical regularities and provide predictions on when firms will offer equity based compensation to their employees

the use of management control mechanisms to mitigate moral hazard in the decision to outsource using archival data from the u s passenger airline industry this study examines whether management control mechanisms aimed at mitigating moral hazard explain outsourcing decisions over and above transaction cost economics tce determinants documented in prior research consistent with tce theory we find that in house production efficiencies and our proxy for transaction risk i e deriving from transaction infrequency transaction complexity and relationship specific investments significantly explain the extent of outsourcing of aircraft maintenance we extend tce insights to show that incentive delta i e the sensitivity of ceo portfolio holdings to stock price changes strengthens the negative association between production efficiencies and outsourcing while incentive vega i e the sensitivity of ceo holdings to stock return volatility weakens the negative association between transaction risk and outsourcing monitoring strengthens the negative association between in house production efficiencies and outsourcing but has no effect on the transaction risk outsourcing relation the results suggest that the use of outsourcing to achieve cost savings is promoted through both incentive contracts and monitoring but outsourcing to achieve the desired risk level is promoted only through incentive contracts

partial pooling at the reserve price in auctions with resale opportunities abstract two features common to many auctions are the use of reserve prices and the existence of secondary markets for the goods being sold even in simple symmetric settings the combination of these features can preclude existence of an equilibrium in symmetric separating bidding strategies with a reserve price sufficiently far below the maximum endogenous valuation a symmetric equilibrium still exists but with some types pooling at the reserve the optimal reserve price depends not only on the joint distribution of bidders information before and after the auction but also on how surplus is divided in the secondary market journal of economic literature classification numbers d44 c7 l1 d82

equilibrium reserve prices in sequential ascending auctions abstract we study a model where bidders have perfectly correlated valuations for two goods sold sequentially in two ascending price auctions the seller sets a reserve price before the beginning of each auction despite the lack of commitment by the seller we characterize an equilibrium and study its properties strategic non disclosure of information takes the form of non participation in the early auction by low valuation bidders while high valuation bidders bid up to their true valuations some buyers who would profitably buy at the reserve price refrain from participating in order to decrease the second auction reserve price

valuing executive stock options with endogenous departure abstract executive stock options differ from exchange traded options because of vesting and portability restrictions executive departure from the firm forces early exercise reducing the value of executive options current methodology calculates the option value by multiplying the black scholes option price by the departure probability this ignores the possibility that executive departure is less likely when stock price is high and thus is correlated with the stock price we show that this correlation implies a substantial increase in option values a similar situation occurs in performance based option packages where the actual number of options granted depends on stock performance

the volatility and price sensitivities of managerial stock option portfolios and corporate hedging we use estimates of the black scholes sensitivity of managers stock option portfolios to stock return volatility and the sensitivity of managers stock and stock option portfolios to stock price to test the relationship between managers risk preferences and hedging activities we find that as the sensitivity of managers stock and stock option portfolios to stock price increases firms tend to hedge more however as the sensitivity of managers stock option portfolios to stock return volatility increases firms tend to hedge less one of the agency costs associated with the corporate form of ownership comes from the risk aversion of the firm s managers the typical corporate manager has a significant portion of his or her wealth invested in the corporation both through portfolio holdings and the value of firm specific human capital as a result managers have an incentive to reduce firm risk more than may be desirable from the perspective of an unaffiliated diversified shareholder one way to mitigate managerial risk aversion is to provide the manager with contracts that have a payoff structure that is a convex function of the firm s stock price smith and stulz 1985 guay 1999 finds that stock options are an important way in which convexity is added to managers portfolios however as recognized by carpenter 2000 and lambert larcker and verrecchia 1991 stock options create two opposing effects on managerial incentives the first effect is sensitivity to stock return volatility due to the convex payoff structure of options the value of a manager s stock option portfolio increases with the volatility of the firm s stock returns this sensitivity to stock return volatility should ceteris paribus give the manager an incentive to take more risk the second effect is sensitivity to stock price this effect comes from the direct link between the payoff of an option and

state ownership and market liberalization evidence from china s domestic m a market abstract we study how state ownership affects the post merger performance of chinese acquirers and find that state owned acquirers soes experience a significantly larger long term performance improvement following mergers compared to their non state owned nsoe counterparts when partitioning the sample period into acquisitions made prior to and following china s split share reform of 2005 we find that the post merger performance improvement of soe acquirers is largely attributed to the post reform period in which controlling shareholders converted their non tradable shares into tradable status our results are consistent with the interpretation that state intervention in the form of capital market liberalization and alleviation of governance problems combined with political connections and privileged access to financing may have a positive effect on m a performance that outweighs the inefficiency cost of state ownership in china

merger negotiations and the toehold puzzle abstract the substantial control premium typically observed in corporate takeovers makes a compelling case for acquiring target shares a toehold in the market prior to launching a bid moreover auction theory suggests that toehold bidding may yield a competitive advantage over rival bidders nevertheless with a sample exceeding 10 000 initial control bids for us public targets we show that toehold bidding has declined steadily since the early 1980s and is now surprisingly rare at the same time the average toehold is large when it occurs 20 and toeholds are the norm in hostile bids to explain these puzzling observations we develop and test a two stage takeover model where attempted merger negotiations are followed by open auction with optimal bidding a toehold imposes a cost on target management causing some targets to rationally reject merger negotiations optimal toeholds are therefore either zero to avoid rejection costs or greater than a threshold so that toehold benefits offset rejection costs the toehold threshold estimate averages 9 across initial bidders reflecting in part the bidder s opportunity loss of a merger termination agreement in the presence of market liquidity costs a threshold of this size may well induce a broad range of bidders to select zero toehold as predicted the probability of toehold bidding decreases and the toehold size increases with the threshold estimate the model also predicts a relatively high frequency of toehold bidding in hostile bids as observed overall our test results are consistent with rational bidder behavior with respect to the toehold decision

accounting conservatism and managerial risk taking corporate acquisitions abstract watts 2003 and ball and shivakumar 2005 argue that accounting conservatism decreases managerial incentives to make negative net present value investments i develop and test a new hypothesis that accounting conservatism is associated with managers making less risky investments i find that under more conservative accounting managers make less risky acquisitions and that firms with accounting based debt covenants drive this association this result is consistent with conservative firms avoiding risky investments because of the potential for large losses to trigger debt covenants conservatism reducing risk shifting can in part explain debt holders demand for conservative accounting

the relation between equity incentives and misreporting the role of risk taking incentives abstract prior research argues that a manager whose wealth is more sensitive to changes in the firm s stock price has a greater incentive to misreport however if the manager is risk averse and misreporting increases both equity values and equity risk the sensitivity of the manager s wealth to changes in stock price portfolio delta will have two countervailing incentive effects a positive reward effect and a negative risk effect in contrast the sensitivity of the manager s wealth to changes in risk portfolio vega will have an unambiguously positive incentive effect we show that jointly considering the incentive effects of both portfolio delta and portfolio vega substantially alters inferences reported in prior literature using both regression and matching designs and measuring misreporting using discretionary accruals restatements and enforcement actions we find strong evidence of a positive relation between vega and misreporting and that the incentives provided by vega subsume those of delta collectively our results suggest that equity portfolios provide managers with incentives to misreport when they make managers less averse to equity risk

stock splits to profit insider trading lessons from an emerging market abstract stock splits have long presented financial puzzles why are they undertaken why are they associated with abnormal returns abnormal returns particularly those coming shortly before a split s announcement date should raise strong suspicions of insider trading particularly in nations with weak regulatory structures we examined the 718 split events in the emerging stock market of vietnam from 2007 through 2011 we found evidence consistent with illegal insider trading particularly in firms that were vulnerable to insider manipulation and therefore more likely to split their stocks when vulnerable firms stocks did split they provided significant excess short term returns tellingly the abnormal returns on those stocks prior to the split announcements were also extremely high indeed higher than their abnormal post announcement returns moreover trading volume increased prior to the split announcement date this suspicious pattern is what we would expect if insiders were trading on their knowledge we propose that illegal insider trading in contexts where it is possible to escape serious penalty provides a previously undiscussed and cogent explanation for both stock splits and abnormal short term returns

can position limits restrain rogue trading this paper studies the imposition of position limits on commodity futures from the perspective of curbing excessive speculation and thus manipulation we present a simple general equilibrium model in a static rational expectations framework and agent heterogeneity to illustrate that excessive speculation serves to enrich other agents at the expense of the speculator position limits on the contrary are not only superfluous but also counter productive as they exacerbate market power and lead to a deterioration in efficiency position limits not only reduce social welfare but also cannot restrain market manipulation

the sensitivity of ceo wealth to equity risk an analysis of the magnitude and determinants abstract to control risk related incentive problems equity holders are expected to manage both the convexity and slope of the relation between firm performance and managers wealth i find stock options but not common stockholdings significantly increase the sensitivity of ceos wealth to equity risk cross sectionally this sensitivity is positively related to firms investment opportunities this result is consistent with managers receiving incentives to invest in risky projects when the potential loss from underinvestment in valuable risk increasing projects is greatest firms stock return volatility is positively related to the convexity provided to managers suggesting convex incentive schemes influence investing and financing decisions

profiting from government stakes in a command economy evidence from chinese asset sales abstract we examine the market response to an unexpected announcement of the sale of government owned shares in china in contrast to earlier work we find a negative effect of government ownership on returns at the announcement date and a symmetric positive effect from the policy s cancellation we suggest that this results from the absence of a chinese political transition to accompany economic reforms so that the benefits of political ties outweigh the efficiency costs of government shareholdings companies managed by former government officials have positive abnormal returns suggesting that personal ties can substitute for government ownership as a source of connections

disentangling the incentive and entrenchment effects of large shareholdings this article disentangles the incentive and entrenchment effects of large ownership using data for 1 301 publicly traded corporations in eight east asian economies we find that firm value increases with the cash flow ownership of the largest shareholder consistent with a positive incentive effect but firm value falls when the control rights of the largest shareholder exceed its cash flow ownership consistent with an entrenchment effect given that concentrated corporate ownership is predominant in most countries these findings have relevance for corporate governance across the world

market fairness the poor country cousin of market efficiency both fairness and efficiency are important considerations in market design and regulation yet many regulators have neither defined nor measured these concepts we develop an evidencebased policy framework in which these are both defined and measured using a series of empirical proxies we then build a systems estimation model to examine the 2003 2011 explosive growth in algorithmic trading at on the london stock exchange and nyse euronext paris our results show that greater at is associated with increased transactional efficiency and reduced information leakage in top quintile stocks for less liquid stocks manipulation at the close declines we also document the tradeoff between reduced spreads and increased manipulation or information leakage following the introduction of mifid1

ipo mechanisms monitoring and ownership structure1 this paper analyzes the e ect of di erent ipo mechanisms on the structure of share ownership and explores the role of underpricing and rationing in determining investors shareholdings we focus on the agency problem that results when large institutions are the only investors capable of monitoring the firm whereas small shareholders free ride on these activities the major conclusion is that some well known aspects of ipos may be explained as rational responses by the issuer to the existence of regulatory constraints in public capital markets there is a two stage o ering mechanism in which the investment banker acting in the interests of the issuer optimally rations the allotment of shares to small investors in order to capture the benefits associated with better monitoring by institutions importantly in our model the existence of underpricing and oversubscription is an indication that the issuer has received a higher ex ante price than would have been obtained through a competitive walrasian type o ering process 1998 elsevier science s a all rights reserved jel classification g24 g32 g38

equity compensation and the sensitivity of research and development to financial market frictions abstract when financial market frictions exist executives may have to decide which investment activities to reduce when internal funds decrease expenditures on research and development r d may be particularly vulnerable because of the long term nature of innovative activity we find that equity compensation is associated with lower levels of firm r d expenditures rewarding executives to incur more risk has little effect on r d expenditures but rewarding executives for higher returns reduces r d expenditures and makes r d expenditures more sensitive to financial market frictions in contrast cash compensation reduces the sensitivity of r d expenditures to financial market frictions

asymmetric auctions with resale we study first and second price auctions with resale in a model with indepen dent private values with asymmetric bidders the resulting inefficiencies create a motive for post auction trade which in our model takes place via monopoly pricing the winner makes a take it or leave it offer to the loser we show a a first price auction with resale has a unique monotonic equilibrium and b with resale the expected revenue from a first price auction exceeds that from a second price auction the inclusion of resale possibilities thus permits a gen eral revenue ranking of the two auctions that is not available when these are excluded jel d44

the cost of capital and optimal financing policy in a dynamic setting abstract this paper revisits the modigliani miller propositions on the optimal financing policy and cost of capital in a dynamic setting in an environment without taxes and bankruptcy costs the results are generally consistent with the modigliani miller propositions 1 and 2 however the first proposition should be presented and interpreted more carefully as given firm characteristics there is only one optimal capital structure thus a firm s capital structure is relevant a relaxation of assumptions about either taxes or bankruptcy costs leads to conclusions that are generally different from those in modigliani and miller 1958 the model predicts that leverage and sales to capital ratios decrease but firm size and capital stock increase with the subjective discount factor of the firm s manager if there are taxes and bankruptcy costs the empirical analysis supports these predictions

partial privatization and firm performance most privatization programs begin with a period of partial privatization in which only non controlling shares of firms are sold on the stock market since management control is not transferred to private owners it is widely contended that partial privatization has little impact this perspective ignores the role that the stock market can play in monitoring and rewarding managerial performance even when the government remains the controlling owner using data on indian state owned enterprises we find that partial privatization has a positive impact on profitability productivity and investment widespread privatization in recent decades has generated a large empirical literature concerning the effect of ownership on firm performance most studies find that privatization has a positive impact on the profitability and efficiency of firms see megginson and netter 2001 for a recent survey 1 the firms in these studies have had a majority of their assets privatized and control rights have been transferred from the government to private owners surprisingly little is known about the effect of partial privatization where the government remains the controlling owner this paper seeks to address this gap in the literature by investigating whether the performance of state owned enterprises in india is affected by the sale of non controlling equity stakes on the stock market

firm specific information and the efficiency of investment abstract in the three year period following stock market liberalizations the growth rate of the typical firm s capital stock exceeds its pre liberalization mean by an average of 4 1 percentage points cross sectional changes in investment are significantly correlated with the signals about fundamentals embedded in the stock price changes that occur upon liberalization panel data estimations show that a 10 percentage point increase in a firm s expected future sales growth predicts a 2 9 to 3 5 percentage point increase in the growth rate of its capital stock country specific changes in the cost of capital drive changes in investment but firm specific changes in the cost of capital do not

stock price manipulation it is generally agreed that speculators can make profits from insider trading or from the release of false information both forms of stock price manipulation have now been made illegal in this article the authors ask whether it is possible to make profits from a different kind of manipulation in which an uninformed speculator simply buys and sells shares they show that in a rational expectations framework where all agents maximize expected utility it is possible for an uninformed manipulator to make a profit provided investors attach a positive probability to the manipulator being an informed trader article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

do contracts make them care the impact of ceo compensation design on corporate social performance using the behavioral agency model we analyze how two compensation design characteristics pay performance sensitivity and duration of ceo compensation taking into account multiple vesting periods affect corporate social performance we find that the performance sensitivity of ceo pay is negatively associated with poor social performance but also negatively affects strong social performance these results suggest that pay performance sensitivity increases the relevance of potential negative consequences of poor social performance however the insurance benefits of strong social performance may also become less relevant with respect to the duration of ceo compensation we find that it reduces poor social performance this finding confirms arguments that a long term compensation time horizon increases the perceived threat that the negative effects of poor social performance will become visible with our findings we integrate behavioral agency theory with the traditional stakeholder views

estimating the value of employee stock option portfolios and their sensitivities to price and volatility the costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives accounting choice financing decisions and the valuation of equity we present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock return volatility that is easily implemented using data from only the current year s proxy statement or annual report this method can be applied to either executive stock option portfolios or to firm wide option plans in broad samples of actual and simulated ceo option portfolios we show that these proxies capture more than 99 of the variation in option portfolio value and sensitivities sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics and is most severe in samples of ceos with a large proportion of out of the money options however the proxies explanatory power remains above 95 in all subsamples

the only game in town investors confusion between market gains and trading gains helps explain why they continue trading even though it rarely improves their performance then too some investors reason that if trading based on random selection is as likely to prove profitable as not trading based on any information whatever will result in performance better than neutral the key to the fallacy in their reasoning is the market maker who must impose a spread in order to survive

political connections and the process of going public evidence from china abstract we examine how political connections impact the process of going public specifically we test how political connections impact the pricing of the newly offered shares the magnitude of underpricing and the fixed cost of going public based on the experience of the newly public firms from chinese security markets and using multiple measures of political connections we find robust evidence that the issuing firms with political connections reap significant preferential benefits in the process of going public to be specific we find that firms irrespective of their ownership status with greater political connections have relatively higher offering price lower underpricing and lower fixed costs during the going public process

a battle of informed traders and the market game foundations for rational expectations equilibrium abstract potential manipulation of prices and convergence to rational expectations equilibrium is studied in a game without noise traders informed players with initially long and short positions bulls and bears seek to manipulate consumer expectations in opposite directions in equilibrium period 1 prices reveal the state so manipulation is unsuccessful bears and uninformed consumers sell up to their short sale limits in period 1 bulls buy in period 1 but receive arbitrage losses when the number of bulls and bears approaches infinity the equilibrium converges to the ree without short sale constraints there is a non revealing equilibrium but no revealing equilibrium

resolving the agency problems of external capital through options this paper investigates the role of stock options in resolving the agency problems of external capital as originally identified by jensen and meckling 1976 these problems are precipitated by managerial incentives a to consume excessive non pecuniary benefits or perquisites beyond the optimal level for sole ownership and b to engage in risk shifting in productive decisions so as to transfer wealth from external capital contributors these incentive problems can be resolved through a strategy that judiciously combines call and put options retained by the owner manager and external financiers respectively the resolution of the agency problems through this mechanism provides an economic rationale for the existence of managerial stock options and convertible debt the work by jensen and meckling 7 has brought more realism to the theory of the firm in their paper jm address agency problems in the context of a firm which is viewed as a nexus of contracts among various factors of production the contractual relationships involve incentive conflicts arising from the pursuit of self interest by limiting themselves to an entrepreneur or owner manager who retains complete control of the firm jm have demonstrated that financing through the issuance of common stock or debt to outsiders engenders costs these costs are precipitated in part by the manager s propensity to consume nonpecuniary benefits or perquisites perks by employing certain resources in excess of their optimal usage 1 and by his propensity to engage in high risk investment projects so as to transfer wealth from bondholders to stockholders 2

lower salaries and no options on the optimal structure of executive pay we estimate a standard principal agent model with constant relative risk aversion and lognormal stock prices for a sample of 598 us ceos the model is widely used in the compensation literature but it predicts that almost all of the ceos in our sample should hold no stock options instead ceos should have lower base salaries and receive additional shares in their companies for a typical value of relative risk aversion almost half of the ceos in our sample would be required to purchase additional stock in their companies from their private savings the model predicts contracts that would reduce average compensation costs by 20 while providing the same incentives and the same utility to ceos we investigate a number of extensions and modi cations of the standard model but nd none of them to be satisfactory we conclude that the standard principal agent model typically used in the literature cannot rationalize observed contracts one reason may be that executive pay contracts are suboptimal

do firms hedge in response to tax incentives there are two tax incentives for corporations to hedge to increase debt capacity and interest tax deductions and to reduce expected tax liability if the tax function is convex we test whether these incentives affect the extent of corporate hedging with derivatives using an explicit measure of tax function convexity we find no evidence that firms hedge in response to tax convexity our analysis does however indicate that firms hedge to increase debt capacity with increased tax benefits averaging 1 1 percent of firm value our results also indicate that firms hedge because of expected financial distress costs and firm size an increasing number of corporations use financial derivatives each year the international swaps and derivatives association reports that the notional value of outstanding otc swap contracts increased from 11 3 trillion in 1994 to more than 60 trillion by mid 2000 http 00www isda org this is interesting because financial theory tells us that corporate risk management enhances value only in the presence of costly market imperfections a number of empirical studies examine derivative holdings to identify which of the proposed theoretical incentives and imperfections lead to corporate hedging our paper adds to the hedging literature by testing whether corporations respond to two tax related incentives to hedge the incentive to reduce volatility thereby increasing debt capacity and the tax benefits of debt and the incentive to reduce expected tax liabilities by reducing the volatility of taxable income we also use a refined dependent variable to measure net

auctions with imperfect commitment when the reserve may signal the cost to re auction if bidders are uncertain whether the auctioneer sticks to the announced reserve they respond with strategic non participation speculating that the auctioneer may revoke the reserve however the reserve inadvertently signals the auctioneer s type which drives multiplicity of equilibria eliminating belief systems that violate the intuitive criterion yields a unique equilibrium reserve price equal to the seller s consumption value paradoxically even if bidders initially believe that the auctioneer is bound by his reserve almost with certainty commitment has no value commitment is a shorthand for a high cost to re auction which may reflect a concern for reputation several variations of the model assess the robustness of our results

manipulation and the allocational role of prices it is commonly believed that prices in secondary financial markets play an important allocational role because they contain information that facilitates the efficient allocation of resources this paper identifies a limitation inherent in this role of prices it shows that the presence of a feedback effect from the financial market to the real value of a firm creates an incentive for an uninformed trader to sell the firm s stock when this happens the informativeness of the stock price decreases and the beneficial allocational role of the financial market weakens the trader profits from this trading strategy partly because his trading distorts the firm s investment we therefore refer to this strategy as manipulation we show that trading without information is profitable only with sell orders driving a wedge between the allocational implications of buyer and seller initiated speculation and providing justification for restrictions on short sales

speculation in standard auctions with resale in standard auctions resale creates a role for a speculator a bidder who is commonly known to have no use value for the good on sale we study this issue in environments with symmetric independent private value bidders for second price and english auctions the efficient value bidding equilibrium coexists with a continuum of inefficient equilibria in which the speculator wins the auction and makes positive profits first price and dutch auctions have an essentially unique equilibrium and whether or not the speculator wins the auction and distorts the final allocation depends on the number of bidders the value distribution and the discount factor speculators do not make profits in first price or dutch auctions

how to define illegal price manipulation the term illegal price manipulation is difficult to define current us law does not explicitly define it the finance and econom ics literature uses the term manipulation in an imprecise manner this paper proposes that a trading strategy not be classified as illegal price manipulation unless the violator s intent is to pursue a scheme that undermines eco nomic efficiency both by making prices less accurate as signals for efficient resource allo cation and by making markets less liquid for risk transfer since price effects are market wide we treat the terms price manipulation and market manipulation as synonyms our definition applies equally to financial and com modities markets

markup pricing in mergers and acquisitions this paper studies the relation between the premiums in takeover bids involving exchange listed target firms from 1975 91 and the pre announcement stock price runups the evidence shows that the pre bid runup and the postannouncement increase in the target s stock price the markup are generally uncorrelated with little substitution between the runup and the markup the runup is an added cost to the bidder this finding has important implications for assessing the costs of insider trading it also raises interesting questions about the role of information from public capital markets in private takeover negotiations

informed speculation with imperfect competition competitive rational expectations models have the unsatisfactory property dubbed the schizophrenia problem by hellwig that each trader takes the equilibrium price as given despite the fact that he influences that price an examination of information aggregation in a non competitive rational expectations model using a nash equilibrium in demand functions shows that the schizophrenia problem is avoided by having each trader take into account the effect his demand has on the equilibrium price given a distribution of private information across traders prices reveal less information than in the competition equilibrium and prices no longer become fully informative in the limit as noise trading vanishes or as traders become risk neutral with small traders the model may become one of monopolistic competition not perfect competition in contrast to the competitive model a reasonable model of endogenous acquisition of costly private information is obtained even when traders are risk neutral

the effect of risk on the ceo market this article presents a market equilibrium model of ceo assignment pay and incentives under risk aversion and moral hazard each of the three outcomes can be summarized by a single closed form equation in the presence of moral hazard assignment is distorted from positive assortative matching on firm size as firms with higher risk or disutility choose less talented ceos such firms also pay higher salaries in the cross section but economywide increases in risk or the disutility of being a ceo do not affect pay the strength of incentives depends only on the disutility of effort and is independent of risk and risk aversion if the ceo can affect firm risk incentives rise and are increasing in risk and risk aversion we calibrate the losses from various forms of poor corporate governance such as failures in monitoring and inefficiencies in ceo assignment jel g34 j33 this article presents a market equilibrium model of ceo assignment pay and incentives risk averse managers of different talents are hired in a competitive market by heterogeneous firms which vary in their size risk and level of effort required the level of pay drives the assignment of talent to firms the strength of incentives induces the efficient effort level and is determined by an optimal contracting approach our main contribution is to incorporate risk into a ceo market equilibrium in a tractable manner a large empirical literature has shown that risk is a firstorder determinant of compensation contracts demsetz and lehn 1985 garen 1994 core and guay 1999 oyer and schaefer 2004 peters 2009 peters and wagner 2009 but most theories assume risk neutrality this assumption is