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Essays in corporate finance theory [electronic resource]
Malenko, Andrey2011.This thesis consists of three essays that examine various problems in corporate finance. The central theme of all essays is information asymmetry between agents. The first essay features information asymmetry between the headquarters and the division manager about investment projects of the division and studies the best way to provide the manager with incentives to invest efficiently. The second essay studies implications of asymmetric information between the decision-maker and the outsiders on exercise decisions of real options in several settings. The third essay features asymmetric information between sellers of assets and potential buyers and studies what selling procedures arise in equilibrium in a market with multiple sellers and potential buyers. More specifically, in Chapter 1 of the dissertation, I study optimal design of a capital allocation system in a firm in which the division manager with empire-building preferences privately observes the arrival and properties of investment projects, and the headquarters is able to audit each project at a cost. I show that under certain conditions the optimal system takes the form of a budgeting mechanism with threshold division of authority. Specifically, the headquarters: (i) allocates a spending account to the manager at the initial date and accumulates it over time; (ii) sets a threshold on the size of individual projects, such that all projects below the threshold are delegated to the manager and financed out of her spending account, while all projects above the threshold are audited and financed fully by the headquarters. I extend the model in several directions, including multiple audit technologies, multiple project categories, and the possibility of renegotiation. In Chapter 2, which is the product of joint work with Steven R. Grenadier, forthcoming in the Review of Financial Studies, we study games in which the decision to exercise an option is a signal of private information to outsiders, whose beliefs affect the utility of the decision-maker. In a general setting that accommodates a variety of applications we show that signaling incentives distort the timing of exercise, and the direction of distortion depends on whether the decision-maker's utility increases or decreases in the outsiders' belief about the payoff from exercise. In the former case, signaling incentives erode the value of the option to wait and speed up option exercise, while in the latter case option exercise is delayed. We demonstrate the implications of the general model through four corporate finance applications: investment under managerial myopia, venture capital grandstanding, investment under cash flow diversion, and product market competition. In Chapter 3, which is the product of joint work with\ Alexander S.\ Gorbenko, forthcoming in the American\ Economic Review, we study simultaneous security-bid second-price auctions with competition among sellers for potential bidders. The key difference from the prior literature on competition among auctioneers is that we allow bidders to make bids in the form of contingent claims on future payoffs of the assets. The sellers compete for bidders by designing ordered sets of securities that the bidders can offer as payment for the assets. Upon observing auction designs, potential bidders decide which auctions to enter. We characterize all symmetric equilibria and show that there always exist equilibria in which auctions are in standard securities or their combinations. In large markets the unique equilibrium is auctions in pure cash. We extend the model for competition in reserve prices and show that binding reserve prices never constitute equilibrium as long as equilibrium security designs are not call options.
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Essays in corporate finance theory [electronic resource]
Malenko, Andrey, Mr.2011.This thesis consists of three essays that examine various problems in corporate finance. The central theme of all essays is information asymmetry between agents. The first essay features information asymmetry between the headquarters and the division manager about investment projects of the division and studies the best way to provide the manager with incentives to invest efficiently. The second essay studies implications of asymmetric information between the decision-maker and the outsiders on exercise decisions of real options in several settings. The third essay features asymmetric information between sellers of assets and potential buyers and studies what selling procedures arise in equilibrium in a market with multiple sellers and potential buyers. More specifically, in Chapter 1 of the dissertation, I study optimal design of a capital allocation system in a firm in which the division manager with empire-building preferences privately observes the arrival and properties of investment projects, and the headquarters is able to audit each project at a cost. I show that under certain conditions the optimal system takes the form of a budgeting mechanism with threshold division of authority. Specifically, the headquarters: (i) allocates a spending account to the manager at the initial date and accumulates it over time; (ii) sets a threshold on the size of individual projects, such that all projects below the threshold are delegated to the manager and financed out of her spending account, while all projects above the threshold are audited and financed fully by the headquarters. I extend the model in several directions, including multiple audit technologies, multiple project categories, and the possibility of renegotiation. In Chapter 2, which is the product of joint work with Steven R. Grenadier, forthcoming in the Review of Financial Studies, we study games in which the decision to exercise an option is a signal of private information to outsiders, whose beliefs affect the utility of the decision-maker. In a general setting that accommodates a variety of applications we show that signaling incentives distort the timing of exercise, and the direction of distortion depends on whether the decision-maker's utility increases or decreases in the outsiders' belief about the payoff from exercise. In the former case, signaling incentives erode the value of the option to wait and speed up option exercise, while in the latter case option exercise is delayed. We demonstrate the implications of the general model through four corporate finance applications: investment under managerial myopia, venture capital grandstanding, investment under cash flow diversion, and product market competition. In Chapter 3, which is the product of joint work with\ Alexander S.\ Gorbenko, forthcoming in the American\ Economic Review, we study simultaneous security-bid second-price auctions with competition among sellers for potential bidders. The key difference from the prior literature on competition among auctioneers is that we allow bidders to make bids in the form of contingent claims on future payoffs of the assets. The sellers compete for bidders by designing ordered sets of securities that the bidders can offer as payment for the assets. Upon observing auction designs, potential bidders decide which auctions to enter. We characterize all symmetric equilibria and show that there always exist equilibria in which auctions are in standard securities or their combinations. In large markets the unique equilibrium is auctions in pure cash. We extend the model for competition in reserve prices and show that binding reserve prices never constitute equilibrium as long as equilibrium security designs are not call options.
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