Timing Decisions in Organizations: Communication and Authority in a Dynamic Environment

We consider a problem where an uninformed principal makes a timing decision interacting with an informed but biased agent. Because time is irreversible, the direction of the bias crucially affects the agent's ability to credibly communicate information. When the agent favors late decision making, full information revelation often occurs. In this case, centralized decision making, where the principal retains authority and communicates with the agent, implements the optimal decision-making rule. When the agent favors early decision making, communication is partial, and the optimal decision-making rule is not implemented. Delegation adds value when the bias is for early decision making, but not for late decision making

Auction Design with Advised Bidders

This paper studies efficient and optimal auction design where bidders do not know their values and solicit advice from informed but biased advisors via a cheap-talk game. When advisors are biased toward overbidding, we characterize efficient equilibria of static auctions and equilibria of the English auction under the NITS condition (Chen, Kartik and Sobel (2008)). In static auctions, advisors transmit a coarsening of their information and a version of the revenue equivalence holds. In contrast, in the English auction, information is transmitted perfectly from types in the bottom of the distribution, and pooling happens only at the top. Under NITS, any equilibrium of the English auction dominates any efficient equilibrium of any static auction in terms of both efficiency and the seller's revenue. The distinguishing feature of the English auction is that information can be transmitted over time and bidders cannot submit bids below the current price of the auction. This results in a higher efficiency due to better information transmission and allows the seller to extract additional profits from the overbidding bias of advisors. When advisors are biased toward underbidding, there is an equilibrium of the Dutch auction that is more efficient than any efficient equilibrium of any static auction, however, it can bring lower expected revenue. Keywords auction design, cheap-talk, full revelation, english auction, communicatio

Strategic and Financial Bidders in Takeover Auctions

Using data on auctions of companies, we estimate valuations (maximum willingness to pay) of strategic and financial bidders from their bids. We find that a typical target is valued higher by strategic bidders. However, 22.4% of targets in our sample are valued higher by financial bidders. These are mature, poorly performing companies. We also find that (i) valuations of different strategic bidders are more dispersed and (ii) valuations of financial bidders are correlated with aggregate economic conditions. Our results suggest that different targets appeal to different types of bidders, rather than that strategic bidders always value targets more because of synergies

Competition among Sellers in Securities Auctions

We study simultaneous security-bid second-price auctions with competition among sellers for potential bidders. The sellers compete 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. (JEL D44, D82, G10)

A theory of LBO activity based on repeated debt-equity conflicts

We develop a theory of leveraged buyout (LBO) activity based on two elements: the ability of private equity-owned firms to borrow against their sponsors' reputation with creditors and externalities in sponsors' reputations due to competition and club formation. In equilibrium, the two sources of value creation in LBOs, operational improvements and financing, are complements. Moreover, sponsors that never add operational value cannot add value through financing either. Club deals are beneficial ex post by allowing low-reputation bidders with high valuations to borrow reputation from high-reputation bidders with low valuations, but they can destroy value by reducing bidders' investment in reputation. Unlike leverage of independent firms, driven only by firm-specific factors, buyout leverage is driven by economy-wide and sponsor-specific factors

Optimal Dynamic Capital Budgeting

© The Author(s) 2018. Published by Oxford University Press on behalf of The Review of Economic Studies Limited. I study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire-building preferences privately observes the arrival and properties of investment projects, and headquarters can audit projects at a cost. Under certain conditions, a budgeting mechanism with threshold separation of financing is optimal. Headquarters: (1) allocate a spending account to the manager and replenish it over time; (2) set a threshold, such that projects below it are financed from the account, while projects above are financed fully by headquarters upon an audit. Further analysis studies when co-financing of projects is optimal and how the size of the account depends on past performance of projects

Timing Decisions in Organizations: Communication and Authority in a Dynamic Environment

We consider a problem where an uninformed principal makes a timing decision interacting with an informed but biased agent. Because time is irreversible, the direction of the bias crucially affects the agent's ability to credibly communicate information. When the agent favors late decision making, full information revelation often occurs. In this case, centralized decision making, where the principal retains authority and communicates with the agent, implements the optimal decision-making rule. When the agent favors early decision making, communication is partial, and the optimal decision-making rule is not implemented. Delegation adds value when the bias is for early decision making, but not for late decision making

Real options signaling games with applications to corporate finance,

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. Signaling incentives distort the timing of exercise, and the direction of distortion depends on whether the decision-maker's utility increases or decreases in 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 model's implications through four corporate finance settings: investment under managerial myopia, venture capital grandstanding, investment under cash flow diversion, and product market competition. (JEL G31, D82) The real options approach to investment and other corporate finance decisions has become an increasingly important area of research in financial economics. The main underlying concept is that an investment opportunity is valuable not only because of associated cash flows but also because the decision to invest can be postponed. As a result, when making the investment decision, one must take into account both the direct costs of investment and the indirect costs of foregoing the option to invest in the future. The applications of the real options framework have become quite broad. 1 We thank the anonymous referee, Anat Admati, Felipe Aguerrevere, Geert Bekaert, Nina Boyarchenko, Cecilia Bustamante, Nadya Malenko, Ilya Strebulaev, Pietro Veronesi (the editor), Neng Wang, Jeffrey Zwiebel, seminar participants at Stanford University, and participants at the 2010 Western Finance Association Annual Meeting in Victoria, BC; the 2010 UBC Winter Finance Conference; and the 9 th Trans-Atlantic Doctoral Conference at LBS for their helpful comments. Send correspondence to Steven R. Grenadier, Graduate School of Business, Stanford University, 655 Knight Way, Stanford, CA, 94305. E-mail: [email protected]. Andrey Malenko: MIT Sloan School of Management, 100 Main Street, E62-619, Cambridge, MA, 02142. E-mail: [email protected]. 1 The early literature, started b

Corporate Governance in the Presence of Active and Passive Delegated Investment

We examine the governance role of delegated portfolio managers. In our model, investors decide how to allocate their wealth between passive funds, active funds, and private savings, and fund fees are endogenously determined. Funds' ownership stakes and fees determine their incentives to engage in governance. Whether passive fund growth improves governance depends on whether it crowds out private savings or active funds. In the former case, it improves governance even though it is accompanied by lower fund fees, whereas in the latter case it can be detrimental to governance. Overall, passive fund growth improves governance only if it does not increase fund investors' returns too much. Regulations that decrease funds' costs of engagement can be opposed by both fund investors and fund managers even though they are value-increasing