Financial contracts and contingent control rights

According to empirical studies of venture capital finance, the division of control rights between entrepreneur and venture capitalists is often contingent on certain measures of firm performance. If the indicator of the company’s performance (eg earnings before taxes and interest) is low, the venture capital firm obtains full control of the company. If company performance improves, the entrepreneur retains or obtains more control rights. If company performance is very good, the venture capitalist relinquishes most of his control rights. In this article, we extend the incomplete contracting model of Aghion and Bolton to construct a theoretical model that is consistent with these empirical findings.incomplete contracts; financial contracting; contingent contracts; control rights; joint ownership

An incomplete contracts approach to financial contracting: a comment

We show that the principal result of Aghion and Bolton (1992) related to the optimality properties of contingent control allocations under incomplete contracting environment holds only if an additional condition is satisfied.

Banks' equity stakes in borrowing firms: corporate finance approach

In most countries, banks’ equity holdings in firms that borrow from then are rather small. In light of the theoretical literature, this is somewhat surprising. For example, according to agency cost models, allowing banks to hold equity would seem to alleviate firms’ asset substitution moral hazard problem associated with debt financing. This idea is formalised in John, John, and Saunders in a model where banks are modeled as passive investors and bank loans are the only source of outside finance for firms. In this paper, we argue that this alleged benefit of banks’ equity holding is small or non-existent when banks are modeled explicitly as active monitors and firms have access also to market finance.banks’ equity holdings; firms’ capital structure; social welfare

Are adverse selection models of debt robust to changes in market structure?

Many adverse selection models of standard one-period debt contracts are based on the following seemingly innocuous assumptions. First, entrepreneurs have private information about the quality of their return distributions. Second, return distributions are ordered by the monotone likelihood-ratio property. Third, financiers’ payoff functions are restricted to be monotonically non-decreasing in firm profits. Fourth, financial markets are competitive. We argue that debt is not an optimal contract in these models if there is only one (monopoly) financier rather than an infinite number of competitive financiers.security design; adverse selection; monotonic contracts; monotone likelihood ratio; first-order stochastic dominance

Bank safety under Basel II capital requirements

We consider the impact of mandatory information disclosure on bank safety in a spatial model of banking competition in which a bank’s probability of success depends on the quality of its risk measurement and management systems. Under Basel II capital requirements, this quality is either fully or partially disclosed to market participants by the Pillar 3 disclosures. We show that, under stringent Pillar 3 disclosure requirements, banks’ equilibrium probability of success and total welfare may be higher under a simple Basel II standardized approach than under the more sophisticated internal ratings-based (IRB) approach.Basel II; capital requirements; information disclosure; market discipline; moral hazard

Financial contracts and contingent control rights

According to empirical studies of venture capital finance, the division of control rights between entrepreneur and venture capitalists is often contingent on certain measures of firm performance. If the indicator of the company’s performance (eg earnings before taxes and interest) is low, the venture capital firm obtains full control of the company. If company performance improves, the entrepreneur retains or obtains more control rights. If company performance is very good, the venture capitalist relinquishes most of his control rights. In this article, we extend the incomplete contracting model of Aghion and Bolton to construct a theoretical model that is consistent with these empirical findings.incomplete contracts, financial contracting, contingent contracts, control rights, joint ownership

Esseitä rahoitussopimusten teoriasta

Only abstract. Paper copies of master’s theses are listed in the Helka database (http://www.helsinki.fi/helka). Electronic copies of master’s theses are either available as open access or only on thesis terminals in the Helsinki University Library.Vain tiivistelmä. Sidottujen gradujen saatavuuden voit tarkistaa Helka-tietokannasta (http://www.helsinki.fi/helka). Digitaaliset gradut voivat olla luettavissa avoimesti verkossa tai rajoitetusti kirjaston opinnäytekioskeilla.Endast sammandrag. Inbundna avhandlingar kan sökas i Helka-databasen (http://www.helsinki.fi/helka). Elektroniska kopior av avhandlingar finns antingen öppet på nätet eller endast tillgängliga i bibliotekets avhandlingsterminaler.Väitöskirja koostuu johdantoluvusta ja neljästä rahoitussopimusten teoriaa käsittelevästä tutkimusluvusta. Ensimmäisessä tutkimusluvussa väitän, että monet velkasopimusten optimaalisuutta selittävät haitallisen valikoitumisen mallit, jotka perustuvat näennäisesti ei-kriittisiin oletuksiin, eivät ole robustisia markkinarakenteen muutoksille. Tutkimuksessani väitän, ettei velkasopimus ole optimaalinen sopimus näissä malleissa, jos oletus kilpailullisista rahoitusmarkkinoista korvataan oletuksella, että monopolirahoittaja on yritysten ainoa rahoituksen lähde. Toisessa tutkimusluvussa tutkin mahdollisia hyvinvointivaikutuksia, joita syntyy jos pankkien sallitaan tehdä osakesijoituksia luotottamiinsa yrityksiin. Agentuurikustannusmallien perusteella pankkien osakesijoitukset luotottamiinsa yrityksiin näyttäisivät lievittävän velkarahoitukseen liittyvää yritysten moraalikato-ongelmaa. Tutkimuksessani osoitan, että pankkien osakeomistusten yllämainittu mahdollinen hyöty on pieni tai olematon, kun pankit mallitetaan yritysten monitoroijiksi ja kun mallissa otetaan huomioon, että ainakin osa yrityksistä pystyy hankkimaan rahoitusta suoraan rahoitusmarkkinoilta. Kolmannessa tutkimusluvussa laajennan Aghionin ja Boltonin tunnettua epätäydellisten sopimusten teoriaan perustuvaa mallia ja rakennan teoreettisen mallin, jolla pyrin selittämään seuraavia empiirisiä havaintoja päätösvallan jakamisesta yrittäjän ja pääomasijoittajan välillä. Jos yrityksen kannattavuutta kuvaava signaali (esimerkiksi yrityksen tuotot ennen veroja ja korkokuluja) on huono, pääomasijoittaja saa tyypillisesti kaiken päätösvallan yrityksessä. Jos yrityksen kannattavuus paranee, yrittäjä saa osan päätösvallasta. Jos yrityksen kannattavuus on erinomainen, pääomasijoittaja luopuu suurimmasta osasta päätösvaltaoikeuksiaan. Neljäs tutkimusluku on lyhyt kommentti yllämainittuun Aghionin ja Boltonin malliin. Osoitan, että Aghionin ja Boltonin mallin tärkein tulos, joka liittyy päätösvallan ehdollisen jakautumisen optimaalisuusominaisuuksiin epätäydellisten sopimusten mallissa, pätee vain tietyn ehdon vallitessa.This thesis consists of an introductory chapter and four essays on the financial contracting theory. In the first essay, we argue that many adverse selection models of the standard one-period loan contracts are not robust to changes in the market structure. We argue that debt is not an optimal contract in these models, if there is only one (monopoly) financier instead of a large number of competitive financiers. In the second essay, we examine the welfare effects of allowing banks to hold equity in their borrowing firms. According to the agency cost literature, banks' equity stakes in their borrowing firms would seem to alleviate firms' asset substitution moral hazard problem associated with debt financing. We argue that this alleged benefit of banks' equity holding is small or non-existent when banks are explicitly modeled as active monitors and when firms have access also to market finance. In the third essay, we extend the well-known incomplete contracting model of Aghion and Bolton to attempt to explain the empirical observation that the allocation of control rights between the entrepreneur and the venture capitalist is often contingent in the following way. If the indicator of the company's performance (eg earnings before taxes and interest) is low, the venture capital firm obtains full control of the company. If company performance improves, the entrepreneur retains or obtains more control rights. If company performance is very good, the venture capitalist relinquishes most of his control rights. The fourth essay is a short note, in which we show that main result of the model of Aghion and Bolton related to the optimality properties of contingent control allocations under incomplete contracting environment holds only if an additional condition is satisfied.Saatavana elektronisena: http://www.bof.fi/fin/7_tutkimus/index.st

Adverse Selection and Costly Screening in Credit Markets

Only abstract. Paper copies of master’s theses are listed in the Helka database (http://www.helsinki.fi/helka). Electronic copies of master’s theses are either available as open access or only on thesis terminals in the Helsinki University Library.Vain tiivistelmä. Sidottujen gradujen saatavuuden voit tarkistaa Helka-tietokannasta (http://www.helsinki.fi/helka). Digitaaliset gradut voivat olla luettavissa avoimesti verkossa tai rajoitetusti kirjaston opinnäytekioskeilla.Endast sammandrag. Inbundna avhandlingar kan sökas i Helka-databasen (http://www.helsinki.fi/helka). Elektroniska kopior av avhandlingar finns antingen öppet på nätet eller endast tillgängliga i bibliotekets avhandlingsterminaler.Tässä työssä tarkastelen luottomarkkinoiden toimintaa tilanteessa, jossa luotonhakijoiden haitallinen valikoituminen vaikeuttaa pääomien tehokasta kohdentumista. Oletan, että luotonhakijoiden investointiprojektien tuottavuus ja sitä kautta luotonmaksukyky ovat luotonhakijoiden yksityistä tietoa. Luotonantajat voivat kuitenkin vähentää epäsymmetrisestä informaatiosta aiheutuvia ongelmia investoimalla kustannuksekkaaseen luotonhakijoiden etukäteisarviointiin. Etukäteisarvioinnilla luotonantajat voivat vähentää epäsymmetrisen informaation määrää ennen luottosopimuksen allekirjoittamista. Ensimmäisessä mallissani johdan optimaaliset rahoitussopimukset monopoliluotonantajan ja erilaisten luotonhakijaryhmien välillä tilanteessa, jossa hyvien luotonhakijoiden investointiprojektien luottojen todennäköisyysjakauma on huonojen luotonhakijoiden vastaavaa todennäköisyysjakaumaa parempi ensimmäisen asteen stokastisen dominanssin mielessä. Osoitan, että luotonantajan ja huonojen luotonhakijoiden välinen yksiselitteisesti optimaalinen rahoitussopimus on osakepääoman ja myyntioptiosopimuksen yhdistelmä silloin, kun luotonantaja pystyy uskottavasti sitoutumaan stokastiseen etukäteisarviointiin. Tämä tulos eroaa kirjallisuudessa esitetystä tuloksesta, että tavallinen velkasopimus on optimaalinen rahoitussopimus ympäristössä, jossa oletus monopoliluotonantajasta on korvattu täydellisten luottomarkkinoiden oletuksella. Toisessa mallissani arvioin, kuinka kahden pankin välinen antolainauskorkokilpailu vaikuttaa kustannuksekkaan ja epätäydellisen luotonhakijoiden etukäteisarvioinnin tasoon ympäristössä, jossa vain toisella pankilla on mahdollisuus arvioida luotonhakijat etukäteen. Vertaan optimaalisia investointeja etukäteisarviointiin monopoli- ja duopolimalleissa ja osoitan, että kilpailun lisääntyminen ei vaikuta kyseisiin investointeihin, kun yleinen taloudellinen tilanne on heikko. Kilpailu lisää investointeja etukäteisarviointiteknologiaan yleisen taloudellisen tilanteen ollessa tyydyttävä ja vähentää niitä, kun yleinen taloudellinen tilanne on hyvä. Lisäksi osoitan, että pankkikilpailun kireys on mallissani yleisen taloudellisen tilanteen kasvava funktio.In this thesis we analyse the functioning of credit markets in environments where adverse selection interferes with an efficient allocation of capital. Throughout the thesis we assume that borrowers have private information on the profitability of their investment projects and, consequently, on the probability of being able to repay the funds they have loaned. A special feature of our thesis is that lenders can reduce or totally eliminate the adverse selection problem by expending resources on the ex-ante screening of borrowers. Thus, by investing in ex-ante screening lenders can reduce the informational gap between them and borrowers before the financial contract is signed. In the first model we derive the optimal financial contracts between a monopoly lender and two types of borrowers in an environment where good borrowers' return distributions first-order stochastically dominate bad borrowers' return distributions and where the lender has access to a costly and perfect screening technology. When the lender can commit to stochastic screening - that is, when she can commit to inspect only a certain proportion of loan applicants, the unique optimal contract for bad borrowers combines features of equity and call option contracts. This results contradicts earlier studies, where in an otherwise identical environment but with a large number of small and identical lenders the optimal contract is the standard debt contract. In our second model we investigate how the loan interest rate competition between two banks, only one of which has access to a costly but imperfect ex-ante monitoring technology, affects the optimal level of monitoring and, more generally, the feasibility of monitoring. We compare the investments in monitoring between a monopoly bank and a banking duopoly. We show that the state of economy is a crucial determinant of the effects of competition on the investment in monitoring: for low values of the state of economy, an increase in competition has no effects on monitoring incentives - for intermediate values of the state economy, competition reduces incentives to monitor - and for sufficiently high values of the state of economy, an increase in competition even increases investments in the monitoring technology. Furthermore, the intensity of competition between the two banks is shown to be an increasing function of the state of economy

Puumala Hantavirus Infections Show Extensive Variation in Clinical Outcome

The clinical outcome of Puumala hantavirus (PUUV) infection shows extensive variation, ranging from inapparent subclinical infection (70–80%) to severe hemorrhagic fever with renal syndrome (HFRS), with about 0.1% of cases being fatal. Most hospitalized patients experience acute kidney injury (AKI), histologically known as acute hemorrhagic tubulointerstitial nephritis. Why this variation? There is no evidence that there would be more virulent and less virulent variants infecting humans, although this has not been extensively studied. Individuals with the human leukocyte antigen (HLA) alleles B*08 and DRB1*0301 are likely to have a severe form of the PUUV infection, and those with B*27 are likely to have a benign clinical course. Other genetic factors, related to the tumor necrosis factor (TNF) gene and the C4A component of the complement system, may be involved. Various autoimmune phenomena and Epstein-Barr virus infection are associated with PUUV infection, but hantavirus-neutralizing antibodies are not associated with lower disease severity in PUUV HFRS. Wide individual differences occur in ocular and central nervous system (CNS) manifestations and in the long-term consequences of nephropathia epidemica (NE). Numerous biomarkers have been detected, and some are clinically used to assess and predict the severity of PUUV infection. A new addition is the plasma glucose concentration associated with the severity of both capillary leakage, thrombocytopenia, inflammation, and AKI in PUUV infection. Our question, “Why this variation?” remains largely unanswered

Puumala Hantavirus Infections Show Extensive Variation in Clinical Outcome

The clinical outcome of Puumala hantavirus (PUUV) infection shows extensive variation, ranging from inapparent subclinical infection (70–80%) to severe hemorrhagic fever with renal syndrome (HFRS), with about 0.1% of cases being fatal. Most hospitalized patients experience acute kidney injury (AKI), histologically known as acute hemorrhagic tubulointerstitial nephritis. Why this variation? There is no evidence that there would be more virulent and less virulent variants infecting humans, although this has not been extensively studied. Individuals with the human leukocyte antigen (HLA) alleles B*08 and DRB1*0301 are likely to have a severe form of the PUUV infection, and those with B*27 are likely to have a benign clinical course. Other genetic factors, related to the tumor necrosis factor (TNF) gene and the C4A component of the complement system, may be involved. Various autoimmune phenomena and Epstein-Barr virus infection are associated with PUUV infection, but hantavirus-neutralizing antibodies are not associated with lower disease severity in PUUV HFRS. Wide individual differences occur in ocular and central nervous system (CNS) manifestations and in the long-term consequences of nephropathia epidemica (NE). Numerous biomarkers have been detected, and some are clinically used to assess and predict the severity of PUUV infection. A new addition is the plasma glucose concentration associated with the severity of both capillary leakage, thrombocytopenia, inflammation, and AKI in PUUV infection. Our question, “Why this variation?” remains largely unanswered