measuring returns on investments in collectibles this paper considers the question of how to measure and interpret the financial return to investing in collectibles we review various methodologies for creating priced indexes and then discuss studies that explicitly calculate a rate of return to some set of collectibles while most collectibles appear to yield positive real returns the majority embody more risk and yield lower financial returns than stocks other characteristics of collectibles prices such as covariance with other asset prices are also examined

dynamics of fine wine and asset prices evidence from short and long run co movements this article examines short and long term price linkages among the majority of fine wine and equity markets over the period of 2003 to 2012 we do not consider the price index liv ex 100 or 500 as is typically undertaken in previous studies but rather examine the auction price series of the world s most traded wine vintage pairs 5 bordeaux first growth 8 bordeaux second growth 5 burgundy 3 rhone 4 italian 5 californian 1 australian and 1 portuguese a global equity index is also included using the morgan stanley capital international world cointegration procedures the granger non causality test and ecm are used to analyse short and long run relationships among these markets the results indicate a strong effect of financial markets on wine prices and short term causality for certain wines moreover the findings indicate short run causality between the wines themselves revealing a leader exogenous or follower endogenous status of certain fine wines in price dynamics and also long ru

repudiation and renegotiation the case of sovereign debt a model of sovereign debt is analyzed in this model renegotiation arises in a natural way because information is incomplete the renegotiation game has many equilibria the standard contract theory approach suggests that the parties should agree to choose the efficient equilibrium strategies when the contract is written refinements of the equilibrium notion such as strategic stability suggest that a very inefficient equilibrium may be chosen the tension between these two approaches raises deep questions about the correct way to analyze a large class of contracting problems copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

investment under uncertainty with strategic debt service the presence of a well designed bankruptcy code is an important part of the nancialarchitecture in developed economies by allowing the creditors to seize the assets of theborrowers who fail to make contractual payments the code generates bene cial ex ante e ectson debt capacity and rm value by giving the borrowers options to renegotiate their debtobligations and seek bankruptcy protection the code increases the likelihood that borrowersmay avoid ine cient ex post liquidation as hart 1999 notes the code should balanceex ante rm value maximization with ex post e ciency the bankruptcy codes in di erentcountries weight this tradeo di erently and hence vary in terms of the distribution of rightsand powers between borrowers and lenders in this paper we provide an inter temporal framework to examine how the creditors liquidation rights and the distribution of ex post bargaining powers in uence the rm s in vestment and nancing decisions and a ect ex ante rm value we show that strongerequityholders bargaining power lowers debt capacity reduces rm value and discouragesgrowth option exercising our calibration suggests that the quantitative e ects of ex poststrategic renegotiation on ex ante rm value may be large our paper provides an attempt to integrate nancial architecture into the theory of in vestment growth option exercising by building on two strands of literature investment anddebt pricing we extend the real options approach to investment pioneered by mcdonaldand siegel 1986 and brennan and schwartz 1985 to allow for capital structure decisionsunder strategic debt service we also draw insights from corporate debt pricing capital struc ture literature which focuses on leverage and security pricing after investment has alreadybeen made merton 1974 black and cox 1976 and leland 1994 our paper bridgesthe gap between these two strands of literature by characterizing the optimal investment and nancing decisions and the option value of waiting in closed form we show that the inter action between nancing and investment decisions in the presence of strategic debt servicegenerates new insights and also quantitatively important e ects on ex ante rm value

the role of games in security design we contend that security design should be approached as a problem of game design that is contracts should specify the procedures that govern the behavior of contract participants in determining outcomes as well as the allocations resulting from those outcomes we characterize optimal contracts in two nested classes all contracts including those that depend on the state and state independent contracts we demonstrate that in situations in which the dependence of contracts on the state is limited contracts designed as games can improve the allocation of resources relative to nonstrategic allocation rules article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

aggregate consequences of limited contract enforceability we study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts because of enforceability problems contracts are constrained efficient we show that limited enforceability amplifies the impact of technological innovations on aggregate output this implies that economies with lower enforceability of contracts are characterized by greater macroeconomic volatility a key assumption for the amplification result is that defaulting entrepreneurs are not excluded from the market

to save or savor the rate of return to storing wine for 28 000 one can buy a jaguar xj6 308 shares of mcdonnell douglas stock a one tenth interest in an oklahoma gas well 4i years of undergraduate life at stanford or one bottle of chateau lafite vintage 1806 that s 1 166 67 an ounce at this moment gold is worth only 275 an ounce and you can t smell or drink it saturday review of literature 1979 p 38 nine years ago 70 could persuade a paris restaurant to part with this same bottle of liquid gold goldwyn 1979 p 4 but for balance admire the growth of a slightly more pedestrian vintage a 1959 beaulieu estate bottled cabernet today a case of it may be purchased for 1 200 for the more modest budget 950 will buy a case of 1970 beaulieu george latour private reserve cabernet all this goes to show that wine the right wine in the last 10 years has provided the prudently daring investor with a spectacular return the virtues of wine as a liquid asset have been tested recently by krasker 1979 krasker cannot reject a hypothesis that wine offers no extraordinary rate of return the wine investor can expect no greater return than that which accrues to riskless assets while krasker finds the concept that an investment in wine outperforms treasury bills in nominal return incompatible with the way economists believe most assets are priced his result seems counter to intuition wine as a subcategory of riskless assets seems contrary to wine s very nature wine is a living substance its maturation process extends well beyond the bottling day lasting as long as 20 40 years in the case of some reds while a few others refuse to retire at 65 but the proper age

price determination for a collectible good the case of rare united states coins researchers investigating markets for collectible goods such as paintings 1 2 6 12 antique furniture 7 stradivarius violins 14 wine 8 10 and postage stamps 15 often report rates of return to holding collectibles that are both low 2 6 7 8 12 and volatile 6 7 8 12 baumol 2 argues that the market for paintings of noted deceased artists has no long run equilibrium price because the market is characterized by infrequent trades of unique assets which are available in fixed supply his empirical analysis supports the idea that paintings experience unpredictable price changes and highly dispersed rates of return with a mean near zero in contrast anderson 1 reports estimated equations explaining approximately 60 percent of the variation in log prices of paintings based on the size of painting date of sale and a constructed measure of repute of the artist other researchers have examined markets with more frequent transactions and greater substitutability among the goods traded schnitzel 15 finds that year to year changes in prices of postage stamps are predictable based on age of the stamp and quantity printed ross and zondervan 14 report that variations in quality affect prices but not rates of return of stradivarius violins a result which is consistent with user benefits being invariant with respect to quality among markets for collectibles the market for rare u s coins is active and well organized and faces the potential for increased federal regulation annual sales are estimated at 5 billion 16 two wall street brokerages recently have formed multimillion dollar limited partnerships to invest in rare coins and some coins now are traded on electronic exchanges 5 these innovations have come amid calls for increased regulation to guard against fraudulent grading of coins 5 16 a major determinant of the price of a collectible coin is its grade a measure of condition reflecting qualities such as sharpness of features regulators accuse coin dealers of defrauding collectors of millions of dollars annually by assigning higher than warranted grades to the coins dealers sell while downgrading coins they buy for example the federal trade commission ftc

covenants in venture capital contracts this paper studies how covenants are included in contracts between venture capitalists vcs and entrepreneurs i show that vcs hold covenanted veto rights even though they are shareholders who have access to other powerful governance solutions unlike bank loans and bonds venture capital vc contracts exhibit considerable variation in their contractual designs i exploit this variation to confirm the argument that covenants are in place to overcome a conflict of interest that arises from debt like contractual features of a venture capitalist s preferred stock in particular i find that contracts with higher fixed payoffs include 1 6 more covenants than do contracts with lower fixed payoffs similarly vc contracts with no vc board majority requirement include 0 6 more covenants than do contracts that require a vc board majority covenants are also more common with older companies and when fewer vcs invest in a round my findings contribute to both the debt covenant literature and the entrepreneurial finance literature this paper was accepted by brad barber finance

a theory of corporate capital structure and investment this article uses a general equilibrium framework to explore the origins and limitations of financial intermediaries in the model investors have a generic lending technology that they can improve at a cost those who upgrade become intermediaries to exploit their advantage however conflicts with depositors will limit the banks market presence and they will only lend to moderately endowed firms while bondholders will finance cash rich corporations the article also analyzes the extent to which investors adopt the superior lending technique the nature of bank competition and how corporate and bank conditions affect interest rates and investment copyright 2004 oxford university press

managerial compensation contract and bank bailout policy abstract under the incomplete contract framework we consider an optimal regulatory policy for motivating bank equity owners and bank managers to restructure the bad loans of their banks in the presence of managerial compensation contracts with stock options the regulatory policy studied in this paper is mainly concerned with the design of repayment schedules in the scheme of injection of cash funds into insolvent banks by the regulator we show that the regulator cannot necessarily attain the social optimal allocation by injecting cash funds into insolvent banks through the purchase of subordinated bonds with the risk free interest rate however even in that case we also suggest that if the regulator injects cash funds into active restructuring banks through the purchase of subordinated bonds or preferred stocks with less stringent repayment conditions and nationalizes passive restructuring banks the regulator can attain the social optimal allocation by performing such a non linear injection scheme under certain conditions

repossession and the democratization of credit we exploit a 2004 credit reform in brazil that simplified the sale of repossessed cars used as collateral for auto loans we show that the reform expanded credit to riskier self employed borrowers who purchased newer more expensive cars the legal change has led to larger loans with lower spreads and longer maturities although the credit reform improved riskier borrowers access to credit it also led to increased incidences of delinquency and default our results shed light on the consequences of a credit reform and highlight the crucial role that collateral and repossession play in the liberalization and democratization of credit

politics economics and the regulation of direct interstate shipping in the wine industry in 1986 california passed legislation restricting the direct importation of wine from another state by california residents unless the originating state allowed direct shipment from california wineries to residents in that state the result has been a patchwork of direct shipment regulations across states we examine how various economic and public interest factors affect the likelihood that a state adopts a change in its direct shipment regulation and the nature of that change our results suggest that private and public sector economic considerations lie at the root of direct shipment regulations in the wine industry

heterogeneity and fine wine prices application of the quantile regression approach this study addresses the price heterogeneity of the five first growths of bordeaux we apply the quantile regression qr approach with market segmentation based on wine bottle price quantiles we

liquidation values and the credibility of financial contract renegotiation evidence from u s airlines how do liquidation values affect financial contract renegotiation while the incomplete contracting theory of financial contracting predicts that liquidation values determine the allocation of bargaining power between creditors and debtors there is little empirical evidence on financial contract renegotiations and the role asset values play in such bargaining this paper attempts to fill this gap we develop an incomplete contracting model of financial contract renegotiation and estimate it using data on the airline industry in the united states we find that airlines successfully renegotiate their lease obligations downward when their financial position is sufficiently poor and when the liquidation value of their fieet is low our results show that strategic renegotiation is common in the airline industry moreover the results emphasize the importance of the incomplete contracting perspective to real world financial contract renegotiation

creditor concentration an empirical investigation most of the literature on multiple banking assumes equal financing shares however unequal asymmetric or concentrated bank borrowing is widespread and creditor concentration is only weakly correlated with the number of bank relationships this paper therefore investigates the determinants of creditor concentration for german firms using a comprehensive firm bank level dataset for the time period between 1993 and 2003 we document that corporate borrowing from banks is very often concentrated even for the largest firms in our sample leveraged firms and firms with more redeployable assets concentrate their borrowing from banks as are firms dealing with a relationship lender that is profitable that has lower monitoring costs or that operates in a concentrated regional lending market

the rate of return on investment in wine joyce p jacobsen is wine an investment alternative to stocks and bonds first we review prior studies regarding the pecuniary rate of return to wine and other alternatives to financial assets next we calculate the rate of return to holding red bordeaux wine from 1986 to 1996 using a repeat sale regression finally we contrast the financial performance of wine both on an aggregate basis and for various portfolios to that of other asset classes we conclude that wine does not yield greater returns than financial assets especially when the volatility of returns and transaction costs are taken into account jel d44 g12 c43 investments in art and other collectibles are generally deemed profitable but empirical examinations of the relative attractiveness of noncapital good tangible assets relative to financial instruments have shown that art and other collectibles are not sound investments from a financial point of view there is a large body of literature that calculates the rate of return on alternative asset classes and concludes with few exceptions that nonfinancial assets are not good financial investments however in the case of wine the evidence is mixed collectors often maintain that the pecuniary rate of return on investments in wine is comparable to or exceeds investments in stocks and bonds and economists have not reached a consensus vis a vis the relative attractiveness of wine in this article we consider 1 how investment grade wine compares to other alternative asset classes and 2 whether wine might be a viable investment alternative to stocks or bonds first we consider the results drawn from empirical investigations regarding the relative attractiveness of paintings and other collectibles as investments next we review prior econometric evidence regarding the pecuniary rate of return to wine finally we calculate the return on wine from 1986 to 1996 using a repeat sale regression and contrast wine s financial performance both for an aggregate portfolio and for selected submarkets to that of other asset classes i most investments in collectibles cannot be justified as purely monetary there is a virtual consensus in the economic literature of the arts that financial assets dominate less traditional tangible assets as investments because art and other collectibles embody a compensating differential in the form of a user benefit burton and jacobsen 1999 offer a survey of this literature that finds that most quantitative examinations of the markets for art and other collectibles have concluded that the high risk low return characteristics of noncapital good tangible assets effectively proscribe retaining them as financial investments a seminal study by baumol 1986 for example estimated the real annual rate of return on paintings over the period 1652 to 1961 to be only 0 55 frey and pommerehne 1989 who subsequently extended baumol s data set up through 1987 and expanded it by including sales from more countries also concluded that paintings were relatively unattractive investment instruments yielding only about 1 4 between 1635 and 1949 and 1 6 between 1950 and 1987 on an annual inflation adjusted basis more recent studies have only confirmed that investments in other forms of art and collectibles compare unfavorably to investments in traditional financial assets especially when the rate of return is risk adjusted 1 pesando 1993 for example constructed a price index of modem prints over 1977 to 1992 and estimated that the average real annual rate of return on an aggregate print portfolio was only 1 51 well below the concomitant real return on stocks moreover pesando noted that the risk as measured by the standard deviation of real returns associated with investing in prints was comparable to or even exceeded investments in stocks or long term bonds ii but what about wine

excessive continuation and dynamic agency costs of debt abstract this paper analyses the incentives of the equityholders of a leveraged company to shut it down in a continuous time stochastic environment keeping the firm as an ongoing concern has an option value but equity and debt holders value it differently equityholders decisions exhibit excessive continuation and reduce firm s value using a compound exchange option approach we characterise the resulting agency costs of debt derive the price of these costs and analyse their dynamics we also show how agency costs can be reduced by the design of debt

islamic banks and investment financing islamic law prohibits charging interest we study financial instruments used by islamic banks and find that most are not based on profit and loss sharing equity but instead are very debt like in nature we see some bias against providing financing for agriculture and industry long term financing is rarely offered to entrepreneurs our model shows that debt like instruments are a rational response by islamic banks to their contracting environments as agency problems become more severe debt becomes the dominant instrument of finance we give conditions under which banning debt increases social welfare as well as conditions under which banning debt decreases social welfare

credit rationing and payment incentives a model of borrowing for production is presented where default leads to exclusion from the capital market this means contracts are enforceable provided the current payment is less than or equal to the value of future access to the capital market the main result of the paper is to show that if this constraint binds then credit is rationed

corporate debt overhang and macroeconomic expectations one way in which corporate financial structure affects macroeconomic performance is by creating debt overhang debt overhang occurs when existing debt deters new investment because the benefits from new investment will go to the existing creditors not to the new investors if the economy is booming debt overhang will not bind because the returns to investing are high if the economy is stagnant debt overhang will bind because the returns to investing are low as a result high levels of debt can create multiple expectational equilibria in which animal spirits determine economy activity copyright 1995 by american economic association

drilling and debt this paper documents a previously unrecognized debt related investment distortion using detailed project level data for 69 firms in the oil and gas industry we find that highly levered firms pull forward investment completing projects early at the expense of long run project returns and project value this behavior is particularly pronounced prior to debt renegotiations we test several channels that could explain this behavior and find evidence consistent with equity holders sacrificing long run project returns to enhance collateral values and by extension mitigate lending frictions at debt renegotiations

monitoring and structure of debt contracts this paper presents a theory of optimal debt structure when the moral hazard problem is severe the main idea is that the optimal debt contract delegates monitoring to a single senior lender and that seniority allows the monitoring senior lender to appropriate the full return from his monitoring activities the theory explains i why debt contracts are prioritized ii why short term debt is senior to long term debt and iii why financial intermediaries usually hold short term senior debt whereas long term junior debt is widely held another implication of the theory is that covenant and maturity structures will be set to conform to the seniority structure

optimal debt structure and the number of creditors within an optimal contracting framework we analyze the optimal number of creditors a company borrows from we also analyze the optimal allocation of security interests among creditors and intercreditor voting rules that govern renegotiation of debt contracts the key to our analysis is the idea that these aspects of the debt structure affect the outcome of debt renegotiation following a default debt structures that lead to inefficient renegotiation are beneficial in that they deter default but they are also costly if default is beyond a manager s control the optimal debt structure balances these effects we characterize how the optimal debt structure depends on firm characteristics such as its technology its credit rating and the market for its assets

optimal capital structure and investment with real options and endogenous debt costs we examine the joint optimization of financial leverage and irreversible capacity investment in a real options framework with risky debt and endogenous interest costs higher capacity ceteris paribus increases operating leverage and default probability but lowers ex post adjustment costs and generates larger tax shields a key insight is that financial leverage and capacity are substitutes in the debt market equilibrium we develop novel predictions about the effects of capital adjustment costs operating costs and uncertainty on optimal financial leverage and capacity that may potentially help explain ambiguous empirical results in the literature regarding the determinants of capital structure and investment received march 17 2016 editorial decision july 8 2017 by editor itay goldstein

the financing of innovation learning and stopping we consider the financing of a research project under uncertainty about the time of completion and the probability of eventual success we distinguish between two financing modes namely relationship financing where the allocation decision of the entrepreneur is observable and arm s length financing where it is unobservable we find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes the rate at which funding is released becomes tighter over time under relationship financing and looser under arm s length financing the tradeoff in the choice of financing modes is between lack of commitment with relationship financing and information rents with arm s length financing

the price of wine abstract using historical price records for bordeaux premiers crus we examine the impact of aging on wine prices and the long term investment performance of fine wine in line with the predictions of an illustrative model young maturing wines from high quality vintages provide the highest financial returns past maturity famous ch teaus deliver growing non pecuniary benefits to their owners using an arithmetic repeat sales regression over 1900 2012 we estimate a real financial return to wine investment net of storage costs of 4 1 which exceeds bonds art and stamps returns to wine and equities are positively correlated finally we find evidence of in sample return predictability

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

optimal lending contracts and firm dynamics we develop a general model of lending in the presence of endogenous borrowing constraints borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced in the model the dynamics of debt are closely linked with the dynamics of borrowing constraints in fact borrowing constraints must satisfy a dynamic consistency requirement the value of outstanding debt restricts current access to short term capital but is itself determined by future access to credit this dynamic consistency is not guaranteed in models of exogenous borrowing constraints where the ability to raise short term capital is limited by some prespecified function of debt we characterize the optimal default free contract which minimizes borrowing constraints at all histories and derive implications for firm growth survival leverage and debt maturity the model is qualitatively consistent with stylized facts on the growth and survival of firms comparative statics with respect to technology and default constraints are derived borrowing constraints are an important determinant of firm growth and survival 1 such constraints may arise in connection to the financing of investment opportunities faced by firms or temporary liquidity needs such as those required to survive a recession this paper develops a theory of endogenous borrowing constraints and studies its implications for firm dynamics in our model debt is constrained by the firm s limited liability and option to default a lending contract specifies an initial loan size future financing and a repayment schedule the choice of these variables in turn determines future growth the firm s future borrowing capacity and its ability and willingness to repay hence borrowing constraints and firm dynamics are jointly determined we study this dynamic design problem our model builds on thomas and worral s 1994 model of foreign direct investment at time zero a risk neutral borrower firm or entrepreneur has a project which requires a fixed initial set up cost every period the project yields revenues that increase with the amount of 1 there is considerable evidence suggesting that financing constraints are important determinants of firm dynamics gertler and gilchrist 1994 argue that liquidity constraints may explain why small manufacturing firms respond more to a tightening of monetary policy than do larger manufacturing firms perez quiros and timmermann 2000 show that in recessions smaller firms are more sensitive to the worsening of credit market conditions as measured by higher interest rates and default premia evans and jovanovic 1989 show that the liquidity constraints are essential in the decision to become an entrepreneur fazzari hubbard and petersen 1988 among others view financial constraints as an explanation for the dynamic behaviour of aggregate investment and cabral and mata 1996 are able to fit reasonably well the size distribution of portuguese manufacturing firms by estimating a simple model of financing constraints for surveys see hubbard 1998 and stein 2003

credit default swaps and the empty creditor problem the empty creditor problem arises when a debtholder has obtained insurance against default but otherwise retains control rights in and outside bankruptcy we analyze this problem from an ex ante and ex post perspective in a formal model of debt with limited commitment by comparing contracting outcomes with and without insurance through credit default swaps cds we show that cds and the empty creditors they give rise to have important ex ante commitment benefits by strengthening creditors bargaining power they raise the debtor s pledgeable income and help reduce the incidence of strategic default however we also show that lenders will over insure in equilibrium giving rise to an inefficiently high incidence of costly bankruptcy we discuss a number of remedies that have been proposed to overcome the inefficiency resulting from excess insurance jel g30 g32 g33 one of the most significant changes in the debtor creditor relationship in the

the certification value of private debt renegotiation and the design of financial contracts empirical evidence from europe abstract by using a sample of bank loan renegotiations by european firms i show that the renegotiation of financial contracts bears a certification value while deeply changing the contractual features of the loan over time to the benefit of shareholders i find that amendments to financial covenants and to loan amounts increase the cumulative abnormal returns of a borrowing firm by 10 15 early and less frequent renegotiations of bilateral loans with short maturities also imply a positive stock market reaction amendments signaling the early accrual of new and positive information allow increasing firm value

a theory of debt and equity diversity of securities and manager shareholder congruence this paper shows how the optimal financial structure of a firm complements incentive schemes to discipline managers and how the securities return streams determine the claim holders incentives to intervene in management the theory rationalizes 1 the multipucity of securities 2 the observed correlation between return streams and control rights of securities and 3 the partial congruence between managerial and equity holder preferences over policy choices and monetary rewards as well as the low level of interference of equity in management the theory also offers new prospects for a reappraisal of the earlier corporate finance literature

default and renegotiation a dynamic model of debt we analyze the role of debt in persuading an entrepreneur to pay out cash e ows rather than to divertthem in the e rstpartof the paper we study the optimal debt contract specie cally the trade off between the size of the loan and the repayment under the assumption that some debt contract is optimal in the second part we consider a more general class of nondebt contracts and derive sufficient conditions for debt to be optimal among these