Venture capitalist monitoring: Evidence from governance structures

We examine the impact of venture capitalist (VC) involvement, quality and exit on corporate governance structures at the time of and subsequent to an initial public offering (IPO). Venture capital backed firms utilize governance structures with greater levels of monitoring at the time of an IPO compared to non-backed firms, but this difference begins to dissipate over time. While short-lived, IPOs backed by high quality VCs have greater overall monitoring levels than those IPOs backed by low quality VCs. IPOs backed by high quality VCs use significantly more equity-based compensation than their low quality counterparts. Finally, the exit of a VC materially alters the governance structure of firms. Measures of governance decline following the departure of a venture capital firm. Overall, the presence of a venture capitalist affects governance structures of firms both at the IPO and through the early years as public firms.     

Picking a loser: Strategic surprise in a design and development game

We take a setting in which upstream players produce design ideas and downstream players select among these ideas to develop finished products. Design diversity is valuable at the upstream stage and coordination is valuable at the downstream stage. However, this outcome is not always realized. We show that an intermediary between upstream and downstream can improve on equilibrium outcomes by acting as a coordination and commitment device whose optimal policy must sometimes reward inferior ideas. We apply the model to technology standards, trend‐driven industries, political primaries, and the management of process innovation. We discuss incentives to vertically integrate.     

Are serial Condorcet rules strategy-proof?

Abstract. This paper explores the extent to which majority rule is invulnerable to manipulation by individuals and coalitions, even when majority rule is used to select more than one alternative. The resulting rule may or may not be strategy-proof, depending on the size of the coalitions that can form, and on the nature of the individual preferences over sets of alternatives. No individual can manipulate with respect to a wide family of preferences over sets. The only restriction on the domain of true and revealed individual preferences is that the selection rule is always well defined. Received: 1 November 1999 / Accepted: 7 May 2001 We thank two anonymous referees for suggestions that have significantly improved the paper. We are also grateful to l'Université de Caen for sponsoring a Workshop on Social Choice Theory, where a first draft of this paper was presented in May, 1999, and to the workshop participants for helpful observations. Work on the final version of the paper was done while one of the authors was a guest of the Project on Intergenerational Equity supported by the Ministry of Education, Science, and Technology of Japan. We are grateful to the Ministry and to the project leader, Professor Kotaro Suzumura, for their support.     

Fiscal Stabilization Policy and Fiscal Institutions

In this paper we analyse counter-cyclical fiscal policy withinthe context of a microfounded analysis of business-cycle stabilization.We show that tax and spending instruments can have a usefulcounter-cyclical role, even after allowing for the distortionarynature of the instruments and the need for debt sustainability.A critical barrier to the use of fiscal instruments may be politicaleconomy concerns, and we survey recent suggestions involvingalternative fiscal policy institutions. Footnotes ¹ E-mail addresses: c.b.leith{at}socsci.gla.ac.uk; s.wren-lewis{at}exeter.ac.uk     

Disclosure of Private Information and Reduction of Uncertainty: Environmental Liabilities in the Chemical Industry

We investigate the potential uncertainty-reducing role of accounting information in the context of contingent Superfund liability valuation. We first develop theoretical arguments for the way reduction of uncertainty regarding these contingent liabilities is expected to affect security prices. Empirical proxies are developed for two types of uncertainty surrounding contingent Superfund liabilities: site uncertainty and allocation uncertainty. In a valuation framework, we then investigate whether financial statement disclosures and accruals reduce uncertainty and thereby affect security valuation. Specifically, we analyze the interaction of private information contained in firm disclosures and accruals with inherent uncertainty surrounding contingent Superfund liabilities. Results suggest that in a regulatory environment allowing substantial reporting discretion, firm-provided financial statement information affects valuation of contingent Superfund liabilities by reducing uncertainty. Further, we find that information revealed through accruals versus disclosures is differentially effective at reducing site and allocation uncertainty.     

Money disillusion and stagflation

In the conventional income-expenditure model with rigid wages, the aggregate supply curve is upward sloping. Increases in demand therefore imply increases in real output and employment. We demonstrate here that this conclusion depends on the form of money illusion implied by the rigid wage assumption. If we assume instead that labor supply is more sensitive to price increases than to wage increases, the aggregate supply curve is negatively sloped, and the conventional policy multipliers are thereby reversed. In the second section, we show that this result also follows if labor supply depends on the expected real wage.     

Equity Volatility and Corporate Bond Yields

This paper explores the effect of equity volatility on corporate bond yields. Panel data for the late 1990s show that idiosyncratic firm‐level volatility can explain as much cross‐sectional variation in yields as can credit ratings. This finding, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu (2001), helps to explain recent increases in corporate bond yields.     

The Risk Exposure of Emerging Equity Markets

The low correlation between returns in emerging equity marketsand industrial equity markets implies that the global investorwould benefit from diversification in emerging markets. Thisarticle explores the sensitivity of the emerging-market returnsto measures of global economic risk. When these traditionalmeasures of risk are used, the emerging markets have littleor no sensitivity. This finding is consistent with these markets'being segmented from world capital markets. However, the correlationbetween the emerging-market returns and the risk factors appearsto be changing over time.     

The Fair Value of Cash Flow Hedges,Future Profitability,and Stock Returns

The SEC and FASB recently expressed concerns that investors do not fully assimilate all of the information provided by complex and incomplete derivatives and other comprehensive income (OCI) disclosures. My evidence supports these concerns. Specifically, I examine the information content of unrealized cash flow hedge gains/losses for future profitability and stock returns. An unrealized gain on a cash flow hedge suggests that the price of the underlying hedged item (i.e., commodity price, foreign currency exchange rate, or interest rate) moved in a direction that will impair the firm's profits after the hedge expires. Consequently, I find that unrealized cash flow hedge gains/losses are negatively associated with future gross profit after the firm's existing hedges have expired. This association only holds after the firm has reclassified its hedges into earnings, and is weaker for firms that can pass input price changes on to their customers. Finally, investors do not immediately price the cash flow hedge information. Instead, investors appear surprised by future realizations of gross margin, consistent with the view that complex and incomplete disclosures delay pricing. These results are relevant to policymakers involved in the current FASB and IASB project designed to simplify the accounting and disclosure for derivatives and, in particular, cash flow hedges.