Investment Policy and Exit-Exchange Offers Within Financially Distressed Firms

This article examines the conflict of interest between shareholders and bondholders in a setting in which firms can renegotiate the terms of existing debt with public debtholders. In particular, we consider one of the most common types of debt restructuring: the exit-exchange offer. Our analysis explores the relation between exit-exchange offers and investment choice by the manager, and it concludes that managers, acting strategically on behalf of shareholders, may select inefficient investment projects in order to enhance their bargaining position vis-a-vis creditors. Holding the upside potential of an investment project fixed, managers/shareholders prefer projects with lower payoffs in states of bankruptcy because it induces individual bondholders to accept poorer terms in a debt-for-debt exit-exchange offer, thus generating a greater residual for shareholders in states of solvency. Additionally, we show how the investment inefficiencies in our analysis depend on (i) the inability of bondholders to coordinate their actions; (ii) the ability of managers to commit to suboptimal investment projects; and (iii) the coupling of an individual bondholder's decision to tender and her decision to consent to allow the firm to strip fiduciary covenants. We suggest conditions under which a ban on coupled exit-exchange offers—or alternatively, constraints on “debt-for-debt” exchanges—would be efficiency-enhancing.     

Anti-Mafia Police Actions,Criminal Firms,and Peer Firm Tax Avoidance

Mafia firms introduce distortions in the markets in which they operate, increasing the cost of doing business for peer firms. We investigate whether peers respond by increasing their tax avoidance and thus increasing funds available to compete with the Mafia firms. Using a sample of Italian anti-Mafia police actions that resulted in the removal of Mafia firms and a difference-in-differences approach, we find that peers reduce their tax avoidance following these actions. We further show that, following anti-Mafia police actions, peer firms improve their performance and increase capital investment while enjoying a reduction in the cost of raw materials. Overall, our results highlight the microlevel channels through which Mafia can affect firm outcomes and local economies.     

Stable Assignment of Public Facilities under Congestion

We study the problem of locating multiple public facilities when each member of society has to be assigned to exactly one of these facilities. Individuals' preferences are assumed to be single‐peaked over the interval of possible locations and negatively affected by congestion. We characterize strategy‐proof, efficient, and stable allocation rules when agents have to be partitioned between two groups of users and discuss the normative content of the stability property. Finally we prove that when more than two groups have to be formed, even with common information on the distribution of the peaks, there is no strategy‐proof, efficient, and stable allocation rule.     

The Valuation of Complex Derivatives by Major Investment Firms: Empirical Evidence

This article examines the auction of a portfolio of collateralized mortgage obligations (CMOs) to major broker dealers and institutional investors. The unique data set allows us to analyze a number of important empirical questions related to the valuation of CMOs by the bidders and the elasticity of demand for the securities. The results reveal that the valuations differ substantially implying a significant elasticity of demand.