The Consequences of Information Revealed in Auctions

This paper considers the ramifications of post-auction competition on bidding behavior under different bid announcement policies. In equilibrium, the auctioneer’s announcement policy has two distinct effects. First, announcement entices players to signal information to their post-auction competitors through their bids. Second, announcement can lead to greater bidder participation in certain instances while limiting participation in others. Specifically, the participation effect works against the signalling effect, thus reducing the impact of signalling found in other papers. Revenue, efficiency, and surplus implications of various announcement policies are examined

The Price of Diversifiable Risk in Venture Capital and Private Equity

This paper explores the private equity and venture capital (VC) markets and extends the standard principal-agent problem between the investors and venture capitalist to show how it alters the interaction between the venture capitalist and the entrepreneur. Since the investor-VC contract is set before the VC finds any investments, we show that it is the entrepreneur who must compensate the venture capitalist for any extra risk in the project even though it is the investor who requires the VC to hold the risk and even though the entrepreneur holds all of the market power in the model. Furthermore, although perfectly competitive investors expect zero alpha in equilibrium, the nature of the three way interaction results in a correlation between total risk and investor returns even net of fees. Thus, we show how and why diversifiable risk should be priced in VC deals even though investors are fully diversified. We then take our theory to a unique data set and show that while investors do earn zero alpha on average there is a strong correlation between realized risk and investor returns, exactly as predicted by the theory

Financing Risk and Innovation

We provide a model of investment into new ventures that demonstrates why some places, times, and industries should be associated with a greater degree of experimentation by investors. Investors respond to financing risk―a forecast of limited future funding―by modifying their focus to finance less innovative firms. Potential shocks to the supply of capital create the need for increased upfront financing, but this protection lowers the real option value of the new venture. In equilibrium, financing risk disproportionately impacts innovative ventures with the greatest real option value. We propose that extremely novel technologies may need "hot" financial markets to get through the initial period of discovery or diffusion

Governance and CEO Turnover: Do Something or Do the Right Thing?

We study how corporate governance affects firm value through the decision of whether to fire or retain the CEO. We present a model in which weak governance—which prevents shareholders from controlling the board—protects inferior CEOs from dismissal, while at the same time insulates the board from pressures by biased or uninformed shareholders. Whether stronger governance improves retain/replace decisions depends on which of these effects dominates. We use our theoretical framework to assess the effect of governance on the quality of firing and hiring decisions using data on the CEO dismissals of large U.S. corporations during 1994–2007. Our findings are most consistent with a beneficent effect of weak governance on CEO dismissal decisions, suggesting that insulation from shareholder pressure may allow for better long-term decision making

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)

Price Improvement in Dealership Markets

Price improvement refers to the practice whereby dealers offer executions that improve on quoted prices. Why are these improvements given? Standard thinking is that competition causes dealers to give better prices to customers with less information. This paper contrasts this with a novel theory in which customers negotiate improvements and differential pricing arises from differences in customers' market power. Each theory affects the formation of bid/ask spreads in empirically distinguishable ways. Understanding price improvement and its impact on market participants is critical the regulation of markets, particularly since equal execution is such an important stated goal of the SEC.