Optimal Use of Financial Information

This paper investigates the conditions under which a possessor of valuable information on financial security may prefer to sell it directly or give it away free of charge i.e., donating it to other market participants instead of trading on it. A market participant will never find it optimal to sell or donate the information that s/he has monopolistic ownership of. Otherwise, sale or donation of information has an important commitment effect in that it credibly commits a risk neutral possessor of information to a strategy which promotes more intense competition among informed trader s in the market and makes the trading strategies of other informed trader s les s aggressive. It is this strategic externality that makes the selling or donation of information an optimal strategy. The model in this paper also shows that if the security price does not fully reflect the private in formation of all the traders, diluting the seller's information before selling it is not optimal even if the seller trades on her own account while selling her information

Closed-End Fund Puzzles and Value of Fund Manager's Private Information

This paper presents a theoretical model of closed- end fund pricing within a multi-period framework in which the fee charged by the fund manager and investors expectation on the fund manager's future performance can explain some of the puzzles associated with closed-end fund prices. Closed-end fund can be regarded as a financial intermediary through which uninformed but rational traders invest in risky securities with the help of an informed fund manager. This paper shows that i) the closed-end fund starts at a premium but it is more likely to sell at discount at later periods, ii) the price and discount of closed-end fund are subject to greater fluctuation than the price of assets invested by the fund, and iii) liquidation decision depends on the size of discount as well as the cost associated with it.

Managerial risk-taking incentives, product market competition, and welfare

Managers’ compensation may increase with the variance of the firm's profits. This paper investigates how this affects their choice of strategic variables, and how that affects managerial compensation. The social welfare aspects of this interaction are analyzed in a duopoly setting with uncertain linear demand and linear marginal cost. Compared to a situation in which the managers’ compensation does not depend on the variance of profits, social welfare may be either higher, lower, or remain unaffected, depending on the slope of the marginal cost curve and whether the competing firms produce goods that are demand substitutes or complements

Information sharing, information free-riding and capital structure in oligopolies

We study the effect of capital structure decisions on the incentives for firms in a duopoly to share information through a trade association. Focusing on the case of Cournot competition with demand uncertainty, we find that the standard result for all-equity firms that information will not be shared may be reversed. When one firm has better access to information than the other, leverage may be a way for the latter firm to free-ride on the former firm's information. With ex ante symmetric firms, a trade association will be formed even if information sharing does not occur