Using Stock Price Information to Regulate Firms

This paper examines the role of the information contained in stock prices in the regulation of privatized firms. Stock prices contain noisy but unbiased information about firm's future prospects that regulators can use to decide on some regulatory policies. The main argument developed is that the observation of stock price movements reduces the incentives of regulators to develop their own monitoring technologies and can allow them to commit to relatively light-handed regulations. This protects firm's investments in cost reduction activities and can increase ex ante welfare.     

Collusion, Delegation and Supervision with Soft Information

This paper shows that supervision with soft information is valuable whenever supervisors and supervisees collude under asymmetric information and proceeds then to derive an Equivalence Principle between organizational forms of supervisory and productive activities. We consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agent's type. In a centralized organization, the principal can communicate and contract with both the supervisor and the agent. However, these two agents can collude against the principal. In a decentralized organization, the principal only communicates and contracts with the supervisor who in turn sub-contracts with the agent. We show that the two organizations achieve the same outcome. We discuss this equivalence and provide various comparative statics results to assess the efficiency of supervisory structures.     

The debt hangover: Renegotiation with noncontractible investment

This paper analyses the incentives of the equityholders of a levered company to undertake noncontractible investments. This noncontrability is shown to seriously impede the efficiency of any renegotiation process in the debt overhang problems. Conditions for obtaining a fully efficient level of investment choice are derived.     

The Regulation of Predatory Firms

This article investigates the issue of predation by a regulated firm. Since it has private information, a regulated firm obtains higher rents in case of successful predation: the fewer the competitors, the higher the marginal social value of the regulated firm's effort and the higher the informational rents. Both principals (the investor of a "target" firm and the regulator) have to provide some incentives to prevent predation: the investor has to reduce the sensitivity of refinancing to predation; the regulator has to lower the gain of successful predation. It is shown that there is a trade-off between the power of the regulatory incentive scheme and the regulated firm's incentives to prey. In addition, as deterring predation is costly, the investor and the regulator compete when offering contracts: each wants to free-ride on the other. Hence, predation may occur in equilibrium although it makes both principals worse off.     

Dynamic yardstick mechanisms

This paper shows that the inability of principals to commit to long-term contracts is irrelevant when dealing with several agents whose private information is correlated. This sharply contrasts with the dynamics of contracting without such correlation. The paper also explores what limitations on yardstick mechanisms can justify the use of long-term contracts. We found that the inability of a principal to commit not to renegotiate long-term contracts is without consequence even if there is a bound on transfers that an agent can be asked to pay. In contrast, short-term contracting fails to implement the commitment solution with constraints on transfers. Second, absent current yardstick, the possibility of using correlated mechanisms in the future allows the principal to implement the first-best with a renegotiation-proof long-term contract whereas this cannot be achieved with short-term contracting.     

The Regulation of Predatory Firms

This article investigates the issue ofpredation by a regulated firm. Since it has private information, a regulated firm obtains higher rents in case of successful predation: the fewer the competitors, the higher the marginal social value of the regulated firm's effort and the higher the informational rents. Both principals (the investor of a "target" firm and the regulator) have to provide some incentives to prevent predation: the investor has to reduce the sensitivity of refinancing to predation; the regulator has to lower the gain of successful predation. It is shown that there is a trade-off between the power of the regulatory incentive scheme and the regulated firm's incentives to prey. In addition, as deterring predation is costly, the investor and the regulator compete when offering contracts: each wants to free-ride on the other. Hence, predation may occur in equilibrium although it makes both principals worse off.     

Public Trading and Private Incentives

This article studies the link between public trading and theactivity of a firm's large shareholder who can affect firm value.Public trading results in the formation of a stock price thatis informative about the large shareholder's activity. Thisincreases the latter's incentives to engage in value-increasingactivities. Indeed, if he has to liquidate part of his stakebefore the effect of his activity is publicly observed, a moreinformative price rewards him for his activity. Implicationsare derived for the decision to go public, capital structure,and security design.     

Excessive continuation and dynamic agency costs of debt

This paper analyses the incentives of the equityholders of a leveraged company to shut it down in a continuous time, stochastic environment. Keeping the firm as an ongoing concern has an option value but equity and debt holders value it differently. Equityholders’ decisions exhibit excessive continuation and reduce firm's value. Using a compound exchange option approach, we characterise the resulting agency costs of debt, derive the “price” of these costs and analyse their dynamics. We also show how agency costs can be reduced by the design of debt.