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

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

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

Competition and the Dynamics of Takeover Contests

This paper investigates the effect of potential competition on takeovers which we model as a bargaining game with alternating offers where calling an auction represents an outside option for each bidder at each stage of the game. The model describes a takeover process that is initiated by an unsolicited bidder, and it aims to answer three main questions: who wins the takeover and how? when? and how much is the takeover premium? Our results explain why the takeover premium resulting from a negotiated deal is not significantly different from that resulting from an auction, and why tender offers are rarely observed in reality. We also show that when the threat of the initial bidder to call a tender offer is not credible, the takeover process might end with a private auction organized by the target. Conversely, when the tender offer threat is credible, the takeover process ends with a deal negotiated bilaterally between the bidder and the target. The takeover premium always depends on the degree of potential competition, while it is affected by the target resistance only for weak initial bidders. Finally, the model allows us to draw conclusions on how other dimensions of the takeover process, such as termination fees, control benefits and tender offer costs, affect its dynamics and outcome