Agency Conflicts, Investment, and Asset Pricing

The separation of ownership and control allows controlling shareholders to pursue private benefits. We develop an analytically tractable dynamic stochastic general equilibrium model to study asset pricing and welfare implications of imperfect investor protection. Consistent with empirical evidence, the model predicts that countries with weaker investor protection have more incentives to overinvest, lower Tobin's q, higher return volatility, larger risk premia, and higher interest rate. Calibrating the model to the Korean economy reveals that perfecting investor protection increases the stock market's value by 22%, a gain for which outside shareholders are willing to pay 11% of their capital stock.     

Dynamic Agency and the q Theory of Investment

We develop an analytically tractable model integrating dynamic investment theory with dynamic optimal incentive contracting, thereby endogenizing financing constraints. Incentive contracting generates a history‐dependent wedge between marginal and average q, and both vary over time as good (bad) performance relaxes (tightens) financing constraints. Financial slack, not cash flow, is the appropriate proxy for financing constraints. Investment decreases with idiosyncratic risk, and is positively correlated with past profits, past investment, and managerial compensation even with time‐invariant investment opportunities. Optimal contracting involves deferred compensation, possible termination, and compensation that depends on exogenous observable persistent profitability shocks, effectively paying managers for luck.     

Optimal Leverage and Aggregate Investment

We analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures. Optimal financial contracts can be implemented by a combination of debt and equity when the risk-shifting problem is the most severe while stock options are also needed when the effort problem is the most severe. Worsening of the moral hazard problems leads to decreases in investment and output at the macroeconomic level. Moreover, aggregate leverage decreases with the risk-shifting problem and increases with the effort problem.     

担保机构小心泡沫

钱慌来了,几家欢喜几家忧。中小实业企业在海外市场低迷、原料及劳动力成本上涨、国内银根缩紧的三重打压下"如履薄冰",而与之相对应的是民间资本的活跃与民间信贷机构如雨后春笋般漫山遍野地迅猛生长。     

Optimal Decentralized Investment Management

We study an institutional investment problem in which a centralized decision maker, the Chief Investment Officer (CIO), for example, employs multiple asset managers to implement investment strategies in separate asset classes. The CIO allocates capital to the managers who, in turn, allocate these funds to the assets in their asset class. This two-step investment process causes several misalignments of objectives between the CIO and his managers and can lead to large utility costs for the CIO. We focus on (1) loss of diversification, (2) unobservable managerial appetite for risk, and (3) different investment horizons. We derive an optimal unconditional linear performance benchmark and show that this benchmark can be used to better align incentives within the firm. We find that the CIO's uncertainty about the managers' risk appetites increases both the costs of decentralized investment management and the value of an optimally designed benchmark.     

Investment Dynamics with Information Costs

Investment in physical capital at the microlevel is infrequent and large, or lumpy. The most common explanation for this is that firms face nonconvex physical adjustment costs. The model developed in this paper shows that information costs make investment lumpy at the microlevel, even in the absence of nonconvex adjustment costs. When collecting and processing information are costly, the firm optimally chooses to do it sporadically and to be inactive most of the time. This behavior results in infrequent and possibly large capital adjustments. The model fits plant‐level investment rate moments well, and it also matches some higher order moments of aggregate investment rates.     

Connecting Optimal Capital Investment and Equity Returns

Economic theory predicts a contemporaneous correlation between equity returns and investment growth that is only weakly present in the data. By modifying the firm's production function to include a lag between investment decisions and expenditures, and after correcting for the temporal aggregation of investment, I find the predicted correlation to be present in the data. I estimate the model for 31 industries and find that investment returns are highly correlated with the industry portfolio equity returns. Further, the portion of investment returns orthogonal to equity returns is associated positively with changes in profitability and negatively with lagged differences between equity and investment returns.     

论公共卫生最优支出策略

公共卫生支出具有极强的正外部性.如果由地方政府或私人选择公共卫生支出的水平,那么他们的最优选择是较低的公共卫生支出和较高的个人消费(内含个人医疗支出),整个社会的福利将会处于较低的水平状态.本文在一个动态的框架下分析了发生这种现象的经济学原因,说明中央政府而非地方政府或私人应该对公共卫生的建设承担更大的责任,应由中央政府负责全国公共卫生体系的建设.     

基于自由现金流代理成本假说的投资行为研究

基于自由现金流代理成本假说，本文利用我国上市公司（A股）制造业1998-2003年数据对上市公司投资行为进行实证研究。研究结果表明，（1）经理持股比例越低，代理问题越严重，投资现金流相关性越高。（2）企业融资约束程度越轻，代理问题越严重，投资现金流相关性越高，经理越容易建造“企业帝国”。具体表现为：国家股比例越高，投资现金流相关性越高；净资产税后利润率越高，投资现金流相关性越高；企业规模越大，投资现金流相关性越高。建立有效的公司治理机制可以解决有关代理问题。     

风险投资体系的双重代理与财务目标趋同效应

在市场经济条件下 ,风险投资对于推动整个社会经济的发展具有重要意义。本文主要分析风险投资体系中的双重代理关系 ,探讨投资者、风险资本家与创业者之间财务目标的协调方法 ,研究西方风险投资及其对我国的启示。     

Optimal Security Design and Dynamic Capital Structure in a Continuous-Time Agency Model

We derive the optimal dynamic contract in a continuous‐time principal‐agent setting, and implement it with a capital structure (credit line, long‐term debt, and equity) over which the agent controls the payout policy. While the project's volatility and liquidation cost have little impact on the firm's total debt capacity, they increase the use of credit versus debt. Leverage is nonstationary, and declines with past profitability. The firm may hold a compensating cash balance while borrowing (at a higher rate) through the credit line. Surprisingly, the usual conflicts between debt and equity (asset substitution, strategic default) need not arise.     

How Investment Opportunities Affect Optimal Capital Structure

This article addresses the question of how competition for investments among companies in a certain industry affects their capital structure. The authors develop a new modelling framework that simulates financial variables of a set of firms in a given sector, and uses the framework to analyze how such firms compete for new investments. The leverage of companies affects their flexibility to react to and take advantage of investment opportunities, and the authors show how such flexibility can be optimized to maximize the firm’s growth. As an illustration, they apply the model to a set of European airlines and global pharmaceutical companies. The novelty introduced by this paper is the explicit modelling of the interaction between several companies. The literature on optimal capital structure focuses on individual companies optimizing their capital structure in a world in which the actions of their competitors are exogenous. The authors’ results show how to incorporate the competitive position of the firm as well as the availability of investment opportunities into the capital structure decison.     

Replacement Investment: Optimal Economic Life Under Uncertainty

Replacement investment is essentially a regenerative optimal stopping problem; that is, the key decision concerns when to terminate the life of existing plant – and hence when to start over again. This paper examines this optimisation problem within a continuous time framework and studies the qualitative and quantitative impact of uncertainty on the timing of new investment (and the criteria that should be used for terminating the life of existing plant).     

Optimal Investment and Consumption with Default Risk: HARA Utility

In this paper, we consider a portfolio optimization problem in a defaultable market. The representative investor dynamically allocates his or her wealth among the following securities: a perpetual defaultable bond, a money market account and a default-free risky asset. The optimal investment and consumption policies that maximize the infinite horizon expected discounted HARA utility of the consumption are explicitly derived. Moreover, numerical illustrations are also presented.     

Optimal Consumption and Investment with Transaction Costs and Multiple Risky Assets

We consider the optimal intertemporal consumption and investment policy of a constant absolute risk aversion (CARA) investor who faces fixed and proportional transaction costs when trading multiple risky assets. We show that when asset returns are uncorrelated, the optimal investment policy is to keep the dollar amount invested in each risky asset between two constant levels and upon reaching either of these thresholds, to trade to the corresponding optimal targets. An extensive analysis suggests that transaction cost is an important factor in affecting trading volume and that it can significantly diminish the importance of stock return predictability as reported in the literature.     

Optimal design of rating-trigger step-up bonds: Agency conflicts versus asymmetric information

Agency conflicts and asymmetric information are two possible explanations that may rationalize the use of a step-up provision in the bond indenture. Within a continuous-time framework with bankruptcy costs and tax benefits, we analyze the optimal step-up bond design with respect to both frictions. We find that (i) contrary to existing results, step-up bonds are indeed able to mitigate the asset substitution problem, (ii) the use of a step-up feature can be a credible signal to overcome asymmetric information problems, and (iii) the optimal design as well as the conditions for the optimal use of step-up bonds is considerably different for the two explanations. This outcome implies that, based on observable firm and bond characteristics, it is possible to discriminate between the two motives underlying the use of step-up bonds.     

融资约束、代理成本对企业R&D投资的影响——基于我国上市公司的经验证据

本文以2009-2012年中国上市公司年报数据为研究样本,基于欧拉方程投资模型,采用Kumbhakar and Parmeter(2009)提出的双边随机边界法实证检验融资约束和代理成本对企业R&D投资的影响。结果发现:融资约束与R&D投资显著负相关,代理成本与R&D投资显著正相关。即融资约束导致R&D投资不足,代理成本导致R&D投资过度。进一步分析发现:融资约束使上市公司R&D投资的绝对值(相对值)整体上较最优水平低42.41%(43.27%),代理成本使上市公司R&D投资的绝对值(相对值)整体上较最优水平高22.48%(21.73%),二者抵消后最终表现为净低于最优水平的19.93%(21.54%)。这种差异在不同地区、行业、公司性质及年度里略有不同。由此可见,我国上市公司尚未陷入R&D投资的"加速化陷阱",仍有必要加大R&D投资。论文最后针对研究中发现的问题提出了相应的对策和建议。     

Negotiated Transfer Pricing, Specific Investment, and Optimal Capacity Choice

This paper investigatesinvestment decisions in a divisionalized firm, in which an upstreamdivision supplies an intermediate product to a downstream division.The upstream division's investment includes two simultaneousdecisions. First, the division determines its capacity level,and second, it invests in a firm specific production technologythat lowers the marginal cost of production. Both the capacityand the specificity decision must be made before the actual demandfor the intermediate product is observable. Since the terms ofinternal trade are negotiated between the divisions, the upstreamdivision faces the well-known holdup problem and thus has incentivesto underinvest. It turns out that a simple contract stipulatinga minimum quantity and a transfer price for excessive quantitiesis sufficient to induce the efficient capacity and specificitydecisions.     

Optimal Investment Strategy to Minimize the Probability of Lifetime Ruin

Abstract

I study the problem of how individuals should invest their wealth in a risky financial market to minimize the probability that they outlive their wealth, also known as the probability of lifetime ruin. Specifically, I determine the optimal investment strategy of an individual who targets a given rate of consumption and seeks to minimize the probability of lifetime ruin. Two forms of the consumption function are considered: (1) The individual consumes at a constant (real) dollar rate, and (2) the individual consumes a constant proportion of his or her wealth. The first is arguably more realistic, but the second has a close connection with optimal consumption in Merton’s model of optimal consumption and investment under power utility.

For constant force of mortality, I determine (a) the probability that individuals outlive their wealth if they follow the optimal investment strategy; (b) the corresponding optimal investment rule that tells individuals how much money to invest in the risky asset for a given wealth level; (c) comparative statics for the functions in (a) and (b); (d) the distribution of the time of lifetime ruin, given that ruin occurs; and (e) the distribution of bequest, given that ruin does not occur. I also include numerical examples to illustrate how the formulas developed in this paper might be applied.     

Optimal Timing of Real Estate Investment under an Asymmetric Duopoly

This paper examines the sub-game equilibrium strategies for a duopoly real option model consisting of two firms with asymmetric demand functions. The relative strength of the firms is found to have significant impact on the firms’ equilibrium strategies. Preemptive strategies are critical if difference in strength between the two competing firms is relatively small. Short bursts and recession induced overbuilding are two outcomes in the asymmetric duopoly model. The model, however, predicts that the two phenomena occur in earlier phases of market cycles, rather than in the state of depression. In a depressed market with high volatility, the leader and the follower will both choose the waiting strategies. Construction cascade is, therefore, not an expected phenomenon in a depressed market in the asymmetric duopoly framework. Please forward your comments to the second author at rststf@nus.edu.sg. Your comments are appreciated. The authors wish to thank Stephen Cauley, Walter Torous, an anonymous referee, and participants in the Singapore–Hong Kong Real Estate Research Symposium on 14–15 July 2005 for their constructive comments and suggestions.