Security Design with Investor Private Information

I study the security design problem of a firm when investors rather than managers have private information about the firm. I find that it is often optimal to issue information-sensitive securities like equity. The "folklore proposition of debt" from traditional signalling models only goes through if the firm can vary the face value of debt with investor demand. When the firm has several assets, debt backed by a pool of assets is optimal when the degree of competition among investors is low, while equity backed by individual assets can be optimal when competition is high.Security design; Capital Structure; Auctions; Asset backed securities

Liquidity and Manipulation of Executive Compensation Schemes

Several standard components of managerial compensation contracts have been criticized for encouraging managers to manipulate short-term information about the firm, thereby reducing transparency. This includes bonus schemes that encourage earnings smoothing, and option packages that allow managers to cash out early when the firm is overvalued. We show in an optimal contracting framework that these components are critical for giving long-term incentives to managers. The lack of transparency induced by the features of the contract makes it harder for the principal to engage in ex post optimal but ex ante inefficient liquidity provision to the manager.Executive compensation; earnings management; transparency

European venture capital: myths and facts

We examine the determinants of success in venture capital transactions using the largest deallevel data set to date, with special emphasis on comparing European to US transactions. Using survival analysis, we show that for both regions the probability of exit via initial public offering (IPO) has gone down significantly over the last decade, while the time to IPO has gone up - in contrast, the probability of exit via trade sales and the average time to trade sales do not change much over time. Contrary to perceived wisdom, there is no difference in the likelihood or profitability of IPOs between European and US deals from the same vintage year. However, European trade sales are less likely and less profitable than US trade sales. Venture success has the same determinants in both Europe and US, with more experienced entrepreneurs and venture capitalists being associated with higher success. The fact that repeat or „serial‟ entrepreneurs are less common in Europe and that European VCs lag US VCs in terms of experience completely explains any difference in performance between Europe and the US. Also, contrary to perceived wisdom, we find no evidence of a stigma of failure for entrepreneurs in Europe

Why are Buyouts Levered: The Financial Structure of Private Equity Funds

This paper presents a model of the financial structure of private equity firms. In the model, the general partner of the firm encounters a sequence of deals over time where the exact quality of each deal cannot be credibly communicated to investors. We show that the optimal financing arrangement is consistent with a number of characteristics of the private equity industry. First, the firm should be financed by a combination of fund capital raised before deals are encountered, and capital that is raised to finance a specific deal. Second, the fund investors' claim on fund cash flow is a combination of debt and levered equity, while the general partner receives a claim similar to the carry contracts received by real-world practitioners. Third, the fund will be set up in a manner similar to that observed in practice, with investments pooled within a fund, decision rights over investments held by the general partner, and limits set in partnership agreements on the size of particular investments. Fourth, the model suggests that incentives will lead to overinvestment in good states of the world and underinvestment in bad states, so that the natural industry cycles will be multiplied. Fifth, investments made in recessions will on average outperform investments made in booms.

Wall Street occupations

Many finance jobs entail the risk of large losses, and hard-to-monitor effort. We analyze the equilibrium consequences of these features in a model with optimal dynamic contracting. We show that finance jobs feature high compensation, up-or-out promotion and long work hours, and are more attractive than other jobs. Moral hazard problems are exacerbated in booms, even though pay increases. Employees whose talent would be more valuable elsewhere can be lured into finance jobs, while the most talented employees might be unable to land these jobs because they are “too hard to manage.

Investment banking careers: an equilibrium theory of overpaid jobs

We develop an optimal dynamic contracting theory of overpay for jobs in which moral hazard is a key concern, such as investment banking. Overpaying jobs feature up-or-out contracts and long work hours, yet give more utility to workers than their outside option dictates. Labor markets feature "dynamic segregation," where some workers are put on fast-track careers in overpaying jobs and others have no chance of entering the overpaying segment. Entering the labor market in bad economic times has life-long negative implications for a worker's career both in terms of job placement and contract terms. Moral hazard problems are exacerbated in good economic times, which leads to countercyclical productivity. Finally, workers whose talent would be more valuable elsewhere can be lured into overpaying jobs, while the most talented workers might be unable to land these jobs because they are "too hard to manage"

Informational black holes in financial markets

We study how efficient primary financial markets are in allocating capital when information about investment opportunities is dispersed across market participants. Paradoxically, the very fact that information is valuable for making real investment decisions destroys the efficiency of the market. To add to the paradox, as the number of market participants with useful information increases a growing share of them fall into an "informational black hole," making markets even less efficient. Contrary to the predictions of standard theory, social surplus and the revenues of an entrepreneur seeking financing can be decreasing in the size of the financial market, the linkage principle of Milgrom and Weber (1982) may not hold, and collusion among investors may enhance efficiency

Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts

This paper provides an empirical analysis of the financial structure of large buyouts. We collect detailed information on the financing of 1157 worldwide private equity deals from 1980 to 2008. Buyout leverage is cross-sectionally unrelated to the leverage of matched public firms, and is largely driven by factors other than what explains leverage in public firms. In particular, the economy-wide cost of borrowing is the main driver of both the quantity and the composition of debt in these buyouts. Credit conditions also have a strong effect on prices paid in buyouts, even after controlling for prices of equivalent public market companies. Finally, the use of high leverage in transactions negatively affects fund performance, controlling for fund vintage and other relevant characteristics. The results are consistent with the view that the availability of financing impacts booms and busts in the private equity market, and that agency problems between private equity funds and their investors can affect buyout capital structures.

Health financing for the poor produces promising short-term effects on utilization and out-of-pocket expenditure: evidence from Vietnam

<p>Abstract</p> <p>Background</p> <p>Vietnam introduced the Health Care Fund for the Poor in 2002 to increase access to health care and reduce the financial burden of health expenditure faced by the poor and ethnic minorities. It is often argued that effects of financing reforms take a long time to materialize. This study evaluates the short-term impact of the program to determine if pro-poor financing programs can achieve immediate effects on health care utilization and out-of-pocket expenditure.</p> <p>Method</p> <p>Considering that the program is a non-random policy initiative rolled out nationally, we apply propensity score matching with both single differences and double differences to data from the Vietnam Household Living Standards Surveys 2002 (pre-program data) and 2004 (first post-program data).</p> <p>Results</p> <p>We find a small, positive impact on overall health care utilization. We find evidence of two substitution effects: from private to public providers and from primary to secondary and tertiary level care. Finally, we find a strong negative impact on out-of-pocket health expenditure.</p> <p>Conclusion</p> <p>The results indicate that the Health Care Fund for the Poor is meeting its objectives of increasing utilization and reducing out-of-pocket expenditure for the program's target population, despite numerous administrative problems resulting in delayed and only partial implementation in most provinces. The main lessons for low and middle-income countries from Vietnam's early experiences with the Health Care Fund for the Poor are that it managed to achieve positive outcomes in a short time-period, the need to ensure adequate and sustained funding for targeted programs, including marginal administrative costs, develop effective targeting mechanisms and systems for informing beneficiaries and providers about the program, respond to the increased demand for health care generated by the program, address indirect costs of health care utilization, and establish and maintain routine and systematic monitoring and evaluation mechanisms.</p

Gold Rush Dynamics of Private Equity

Abstract We develop a model with learning that likens private equity waves to gold rushes. Fund managers di¤er in talent, the stock of potential target …rms is depletable, and investment pro…tability is inferred from past outcomes. The model produces waves with endogenous transitions from boom to bust. Supply and demand are inelastic, and supply comoves with investment valuations. Performance di¤erences are persistent, …rst-time funds underperform the industry, and funds raised during booms are less likely to see follow-on activity. Entry and past industry performance are positively related, while contemporaneous entry and performance are inversely related. Finally, the time-series (cross-sectional) relationship between fund size and fund performance is negative (positive and concave)