Is Leverage Effective in Increasing Performance Under Managerial Moral Hazard?

We consider a model in which the principal-agent relation between inside shareholders and the management affects the firm value.We study the effect of financing the project with risky debt in changing the incentive for a risk-neutral shareholder (the principal) to implement the project-value maximizing contract.We show the conditions under which leverage generates agency costs in terms of an ex-ante reduction of the firm value.The result also implies that the optimal remuneration structure includes "low-incentive" bonus when the firm is highly leveraged.This inefficiency does not arise when the the agent is paid with shares of the firm.We can then conclude that the use of debt is effective as a commitment device to implement higher operative performance only if it is accompanied with a compensation policy based on shares remuneration.corporate performance;management;moral hazard;capital structure;incentives;agency theory

PAC Spending and Roll Call Voting in the U.S. House: An Empirical Extension

This paper expands the investigation of how PAC spending affects the roll call voting behavior to the U.S. House of Representatives. Using a theoretical framework which draws on the voting literature, we develop two models that explain Representatives' voting behavior in a pre-PAC and post-PAC world. We find weak support for a Downsian view of voting participation in the first model, and strong support for the alteration of voting incentives resulting from PAC spending in the second model. These results are consistent with earlier findings that investigate Senate behavior.

Market Efficiency and Price Formation When Dealers are Asymmetrically Informed

We consider the effect of asymmetric information on the price formation process in a quote-driven market where one market maker receives a private signal on the security fundamental.A model is presented where market makers repeatedly compete in prices: at each stage a bid-ask auction occurs and the winner trades the security against liquidity traders.We show that at equilibrium the market is not strong-form efficient until the last stage.We characterize a reputational equilibrium in which the informed market maker will affect market beliefs, and possibly misleads them.At this equilibrium, a price leadership effect arises, quotes are never equal to the expected value of the asset given the public information, the informed market maker expected payoff is positive and the rate of price discovery increases in the last stages of trade before the information becomes public.pricing;information;market structure;capital markets

Asymmetries of information in centralized order-driven markets

We study the efficiency of the equilibrium price in a centralized, order-driven market where many asymmetrically informed traders are active for many periods. We show that asymmetries of information can lead to sub-optimal information revelation with respect to the symmetric case. In particular, we assess that the more precise the information the higher the incentive to reveal it, and that the value of private information is related to the volume of exogenous trade present on the market. Moreover, we prove that any informed trader, whatever his information, reveals his private signal during an active phase of the market, concluding that long pre-opening phases are not effective as an information discovering device in the presence of strategic players.Asymmetric information; pre-opening; insider trading

Market based compensation, price informativeness and short-term trading

This paper shows that there is a natural trade-off when designing market based executive compensation. The benefit of market based pay is that the stock price aggregates speculators’ dispersed information and there-fore takes a picture of managerial performance before the long-term value of a firm materializes. The cost is that informed speculators’ willingness to trade depends on trading that is unrelated to any information about the firm. Ideally, the CEO should be shielded from shocks that are not informative about his actions. But since information trading is impossible without non- nformation trading (due to the ”no-trade” theorem), shocks to prices caused by the latter are an unavoidable cost of market based pay. This trade-off generates a number of insights about the impact of market conditions, e.g. liquidity and trading horizons, on optimal market based pay. A more liquid market leads to more market based pay while short-term trading makes it more costly to provide such incentives leading to lower CEO effort and worse firm performance on average. The model is consistent with recent evidence showing that market based CEO incentives vary with market conditions, e.g. bid-ask spreads, the probability of informed trading (PIN) or the dispersion of analysts’ forecasts. JEL Classification: G39, D86, D82Executive compensation, liquidity, Moral Hazard, stock price informativeness, trading

MARKET BASED COMPENSATION, TRADING AND LIQUIDITY

This paper examines the role of trading and liquidity in a large competitive market with dispersed heterogenous information on market-based managerial compensation. The paper recognizes the endogenous nature of a firm’s stock price - it is the outcome of self-interested speculative trading motivated by imperfect information about future firm value. Using the stock price as performance measure means bench-marking the manager’s performance against the market’s expectation of that performance. We obtain two main results: first, the degree of market-based compensation is proportional to the market depth, which is a measure of the ease of information trading. Secondly, using the dynamic trading model of Vives (1995) we show that if the investment horizon of informed traders decreases, at equilibrium the managerial e.ort reduces, and the optimal contract prescribes stock-compensation with longer vesting period.

The Inefficiency of the Stock Market Equilibrium under Moral Hazard

In this paper we study the constrained efficiency of a stock market equilibrium under moral hazard.We extend a standard general equilbrium framework (Magill and Quinzii (1999) and (2002)) to allow for a more general initial ownership distribution.We show that the market allocation is constrained efficient only if in each firm the entrepreneur who generates payoffs through unobservable effort has full initial property rights to his firm.This result holds even if the market can anticipate correctly the optimal effort choice of each entrepreneur from their observable financing decisions.stock markets;moral hazard;general equilibrium;efficiency;allocation

Capital Structure and Managerial Compensation: The Effects of Renumeration Seniority

We show that the relative seniority of debt and managerial compensation has important implications on the design of remuneration contracts.Whereas the traditional literature assumes that debt is senior to remuneration, we show that this is frequently not the case according to bankruptcy regulation and as observed in practice.We theoretically show that including risky debt changes the incentive to provide the manager with stronger performance-related incentives ("contract substitution" effect).If managerial compensation has priority over the debt claims, higher leverage produces lower powerincentive schemes (lower bonuses) and a higher base salary.With junior compensation, we expect more emphasis on pay-for-performance incentives.The empirical findings are in line with the regime of remuneration seniority as the base salary is significantly higher and the performance bonus is lower in financially distressed firms. Series: CentER Discussion Paperseniority of claims;remuneration contracts;financial distress;insolvency;leverage