U.S. consumer demand for prize-linked savings: New evidence on a new product

We report on the potential American demand for prize-linked savings, a savings account that also awards prizes. Our survey data suggests significant interest among individuals with little actual savings, without regular saving habits, who play lotteries extensively, and are optimistic.     

Limited investor attention and the mispricing of American Depositary Receipts

I test whether more investor attention leads to a better exploitation of arbitrage opportunities and, in turn, to less mispricing of American Depositary Receipts (ADRs). Using data on 536 stocks I find that more investor attention significantly reduces ADR mispricing.     

Vertical integration and investor protection in developing countries

The industrial organization of developing countries is characterized by the pervasive use of subcontracting arrangements among small, financially constrained firms. This paper asks whether vertical integration relaxes those financial constraints. It shows that vertical integration trades off the benefits of joint liability against the costs of rendering the supply chain more opaque to external investors. In contrast to the commonly held view that pervasive input and capital market imperfections are conducive to vertical integration, the model predicts that the motives for vertical integration are not necessarily higher in developing countries. In particular, vertical integration is more likely to arise at intermediate levels of investor protection and better contract enforcement with suppliers reduces vertical integration only if financial markets are sufficiently developed. Evidence supporting both predictions is discussed.     

A new measure of financial development: Theory leads measurement

This study presents a new measure of financial development that is directly derived from theory. Our measure, the Marginal Utilization of Debt (hereafter, MUD) comes from the seminal work of Myers (1984), Myers and Majluf (1984) and Shyam-Sunder and Myers (1999). Further, it is directly related to the development facts of Gurley and Shaw (1955). MUD is a global measure that reflects conditions in both debt and equity markets. It varies enormously across nations; from 0.23 in Australia at one extreme to 0.96 in Turkey at the other. Cross‐country variations in MUD are not random; they are related to special‐purpose measures of debt and equity market advancement from the financial development literature. Richer, more advanced nations have smaller average MUDs. We argue that the MUD may be useful for a variety of purposes and provide three example applications.     

Asymmetric group loans,non-assortative matching and adverse selection

This paper shows that an asymmetric group debt contract, where one borrower co-signs for another, but not vice versa, leads to heterogeneous matching. The analysis suggests that micro finance organizations can achieve the first best by offering asymmetric group contracts.     

Cognitive abilities and portfolio choice

We study the relation between cognitive abilities and stockholding using the recent Survey of Health, Ageing and Retirement in Europe (SHARE), which has detailed data on wealth and portfolio composition of individuals aged 50+ in 11 European countries and three indicators of cognitive abilities: mathematical, verbal fluency, and recall skills. We find that the propensity to invest in stocks is strongly associated with cognitive abilities, for both direct stock market participation and indirect participation through mutual funds and retirement accounts. Since the decision to invest in less information-intensive assets (such as bonds) is less strongly related to cognitive abilities, we conclude that the association between cognitive abilities and stockholding is driven by information constraints, rather than by features of preferences or psychological traits.     

The impact of experience on risk taking, overconfidence, and herding of fund managers: Complementary survey evidence

Empirical research has shown that inexperienced fund managers yield significantly higher returns than their more experienced colleagues. If the portfolios of inexperienced are not more risky, this result would contradict the hypothesis of market efficiency. Therefore, it is an important question whether inexperienced fund managers tend to taker higher risks. Higher risk taking may be explained by a higher degree of overconfidence, less herding behavior, or a lower degree of risk aversion. Since the results concerning the relationship between experience and risk taking in previous studies are rather contradictory we provide complementary survey evidence of 117 German fund managers which can improve our understanding in this field. In line with the results of previous studies, we find that herding is decreasing with experience while the evidence concerning risk taking and overconfidence is mixed. Nevertheless, our results provide some support for the hypothesis that inexperienced managers do indeed take higher risks.     

Monitoring a common agent: Implications for financial contracting

Multiple principals want to obtain income from a privately informed agent and design their contracts non-cooperatively. The degree of coordination between principals shapes the contracts and affects the amount of monitoring. Equity-like contracts and excessive monitoring emerge when principals coordinate or verify each other's monitoring efforts. When this is not possible, free riding weakens monitoring incentives, so that flat payments, debt-like contracts, and very low levels of monitoring appear. Free riding may be so strong to induce even less monitoring than if the principals cooperated with each other; that is, non-cooperative monitoring does not necessarily lead to excessive monitoring.     

Monetary Policy Shocks and Heterogeneous Finance Decisions: A Model of Hidden Effort Choice and Financial Intermediation

Abstract. The paper investigates how monetary policy shocks influence the composition of firms' external finance given that firms are heterogeneous. Heterogeneity stems from differences in the availability of internal funds and in the monitoring costs associated with bank finance. These costs are determined by the intensity of the lending relationship. By using a delegated monitoring approach it is found that bank loans serve as a substitute for internal funds if the lending relationship is sufficiently close. Moreover, banks with strong credit ties to their customers are not only able to protect borrowers from liquidity constraints following a monetary tightening but are even able to extend their business lending.     

Search and endogenous concentration of liquidity in asset markets

We develop a search-based model of asset trading, in which investors of different horizons can invest in two assets with identical payoffs. The asset markets are partially segmented: buyers can search for only one asset, but can decide which one. We show the existence of a “clientele’’ equilibrium where all short-horizon investors search for the same asset. This asset has more buyers and sellers, lower search times, and trades at a higher price relative to its identical-payoff counterpart. The clientele equilibrium dominates the one where all investor types split equally across assets, implying that the concentration of liquidity is socially desirable.     

Persistence of initial debt in the long-term employment dynamics of new firms

Abstract.  This paper investigates whether a firm's future growth is independent of its initial debt structure. The non-parametric test consists of determining whether the conditional size distribution for firms surviving through early years of life depends upon debt-to-asset ratio at birth. Initially, I test for initial size dependence in the growth process by applying Pakes and Ericson (1998) procedure. I then test the hypothesis that initial debt-to-asset ratios are irrelevant to growth of ten-year old manufacturing firms. I reject the null of independence, and find evidence of a non-monotonic relationship between age ten conditional size and the initial debt-to-asset ratio.     

Adverse selection in credit markets and regressive profit taxation

In many countries, taxes on businesses are less progressive than labor income taxes. This paper provides a justification for this pattern based on adverse selection that entrepreneurs face in credit markets. Individuals choose between becoming entrepreneurs or workers and differ in their skill in both of these occupations. I find that endogenous cross-subsidization in the credit market equilibrium results in excessive (insufficient) entry of low-skilled (high-skilled) agents into entrepreneurship. This gives rise to a corrective role for differential taxation of entrepreneurial profits and labor income. In particular, a profit tax that is regressive relative to taxes on labor income restores the efficient occupational choice.     

Information-based trade

We study the possibility of trade for purely informational reasons. We depart from previous analyses (e.g. Grossman and Stiglitz (1980) [22] and Milgrom and Stokey (1982) [32]) by allowing the final payoff of the asset being traded to depend on an action taken by its eventual owner. We characterize conditions under which equilibria with trade exist.     

Disorganization and financial collapse

Since the fall of communism, the former Soviet Union experienced a strong output decline and a dramatic increase in arrears and barter. We develop a model which explains how these three phenomena are connected. We introduce liquidity and credit constraints into a model of disorganization and show how these problems can alleviate the hold-up problem. We argue further that barter creates a hostage that allows to deal with disorganization when credit enforcement becomes prohibitively costly. Based on a firm survey in Ukraine in 1997, we test how input shortages, financial shortages and barter affect output growth of firms.     

Front-running dynamics

We integrate a monopolist dual trader into a dynamic model of speculation. In static settings, [J.-C. Rochet, J.-L. Vila, Insider trading without normality, Rev. Econ. Stud. 61 (1994), 131-152] establish an irrelevance result—expected equilibrium outcomes are the same whether the monopolist speculator sees liquidity trade or not; and Roell [Dual-capacity trading and market quality, J. Finan. Intermediation (1990), 105-124] shows that with multiple speculators, dual trading benefits liquidity traders. In dynamic settings, these results are reversed: a front-running speculator exploits knowledge of future liquidity trade, extracting greater profits by smoothing profit extraction intertemporally. Front running introduces positive serial correlation to order flow. Accordingly, market makers discount past order flow in prices, but prices retain the martingale property.     

A ‘technically level playing-field’ profit efficiency analysis of enforced competition between publicly funded institutions

The study demonstrates how recent advances in the data envelopment analysis (DEA) of profit efficiency, and in combining DEA and stochastic frontier analysis (SFA) to measure producer performance, can be used to obtain a ‘technically level playing-field’ profit efficiency performance measure. A three-stage analysis is used to provide an empirical investigation of public-sector universities facing regulatory pressures to attain both profit efficiency and output quality. Stage one employs directional distance function analysis to decompose DEA profit efficiency measures into technical and allocative components. As these performance measures incorporate the impacts of managerial inefficiency, the operating environment and luck (statistical noise), stage two applies SFA to total (radial and non-radial) slacks to obtain a degree of disentanglement from the latter two impacts. The stage-two results are used to define a common environment and common luck scenario, thus permitting university producers’ inputs to be adjusted so as to reflect operation within this more level playing-field scenario. Stage three recomputes the first-stage DEA for this scenario, to yield an (input-focused) ‘technically level playing-field’ measure of profit efficiency that unifies the regulatory financial audit and output-quality indicators in a single, best-practice-benchmarked, performance measure.     

Smart fund managers? Stupid money?

Abstract .  We develop a model of mutual fund manager investment decisions near the end of quarters. We show that when investors reward better performing funds with higher cash flows, near quarter-ends a mutual fund manager has an incentive to distort new investment toward stocks in which his fund holds a large existing position. The short-term price impact of these trades increase the fund's reported returns. Higher returns are rewarded by greater subsequent fund inflows which, in turn, allow for more investment distortion the next quarter. Because the price impact of trades is short term, each subsequent quarter begins with a larger return deficit. Eventually, the deficit cannot be overcome. Thus, our model leads to the empirically observed short-run persistence and long-run reversal in fund performance. In doing so, our model provides a consistent explanation of many other seemingly contradictory empirical features of mutual fund performance.