Booms, Busts, and Fraud

Firms sometimes commit fraud by altering publicly reported informationto be more favorable, and investors can monitor firms to obtainmore accurate information. We study equilibrium fraud and monitoringdecisions. Fraud is most likely to occur in relatively goodtimes, and the link between fraud and good times becomes strongeras monitoring costs decrease. Nevertheless, improving businessconditions may sometimes diminish fraud. We provide an explanationfor why fraud peaks towards the end of a boom and is then revealedin the ensuing bust. We also show that fraud can increase iffirms make more information available to the public.     

Ownership Structure, Speculation, and Shareholder Intervention

An institution holding shares in a firm can use information about the firm both for trading ("speculation") and for deciding whether to intervene to improve firm performance. Intervention increases the value of the institution's existing shareholdings, but intervention only increases the institution's trading profits if it enhances the precision of the institution's information relative to that of uninformed traders. Thus, the ability to speculate can increase or decrease institutional intervention. We examine key factors that affect the intervention decision, the usefulness of "short-swing" provisions and restricted shares in encouraging institutional intervention, and implications for ownership structure across different firms.     

Gross national happiness

This article considers the concept of gross national happinesss, as it has evolved in Bhutan, against the background of literature on the pursuit of happiness as a government objective and the problems associated with different approaches to measuring well-being. It concludes that since all measures of well-being are imperfect, including the measure of gross national happiness currently being applied in Bhutan, the best approach is to use a range of different measures, including conventional national accounting indicators.     

Competition among Financial Intermediaries When Diversification Matters

Many models predict that the diversification and efficiency of financial intermediaries (“banks”) increases with their size, so that a relatively unrestricted banking sector will settle into an equilibrium with several large, well-diversified, and competitive banks. However, this prediction is at odds with the actual pattern of unrestricted banking sector evolution in many countries. I develop a model that motivates this actual pattern and examine the model's implications for regulatory policy. I show that an investor's return from a bank depends on the number of investors using that bank; this adoption externality makes investor beliefs about other investors' actions critical for bank competition. In a young banking system with free entry, coordination problems lead to excessive fragmentation, and debt overhang makes it difficult for small banks to capture additional market share. As the system matures, many banks fail, and the survivors become the focus of investor beliefs; these incumbents gain a strong advantage over entrants, facilitating collusion. Entry restrictions reduce fragmentation but aid collusion, while government insurance for investors reduces incumbency advantage and collusion but may cause excessive fragmentation. Thus, regulators may wish to impose temporary entry restrictions, along with partial insurance. These results are consistent with historical evidence from several countries.Journal of Economic LiteratureClassification Numbers: G21, G22, L13.     

Costly state verification and multiple investors: the role of seniority

Many financial claims specify fixed maximum payments, varyingseniority, and absolute priority for more senior investors.These features are motivated in a model where a firm's managercontracts with several investors and firm output can only beverified privately at a cost. Debt-like contracts of varyingseniority generally dominate symmetric contracts, and, wheninvestors are risk neutral, it is optimal to use debt-like contractswhere more senior claims have absolute priority over more juniorclaims. In addition to motivating several features of debt andpreferred stock, the model offers an explanation for structuresused in leveraged buyouts, asset-backed securitizations, andreinsurance contracts.     

Institutional Liquidity Needs and the Structure of Monitored Finance

A financial institution that finances and monitors firms learnsprivate information about these firms. When the institutionseeks funds to meet its own liquidity needs, it faces adverseselection ("liquidity") costs that increase with the risk ofits claims on these firms. The institution can reduce its liquiditycosts by holding debt rather than equity. Conversely, exceptin a limited setting resembling venture capital, firms thatdepend on monitored finance prefer to give the monitoring institutiondebt rather than equity. Institutions with less frequent orless severe liquidity needs have greater appetite for equityand for the debt of more risky borrowers. These predictionsare consistent with general patterns of monitored finance.     

Entrepreneurial finance: Banks versus venture capital

We analyze how entrepreneurial firms choose between two funding institution: banks, which monitor less intensively and face liquidity demands from their own investors, and venture capitalists, who can monitor more intensively but face a higher cost of capital because of the liquidity constraints that they impose on their own investors. Because the firm's manager prefers continuing the firm over liquidating it and aggressive (risky) continuation strategies over conservative (safe) continuation strategies, the institution must monitor the firm and exercise some control over its decisions. Bank finance takes the form of debt, whereas venture capital finance often resembles convertible debt. Venture capital finance is optimal only when the aggressive continuation strategy is not too profitable, ex ante; the uncertainty associated with the risky continuation strategy (strategic uncertainty) is high; and the firm's cash flow distribution is highly risky and positively skewed, with low probability of success, low liquidation value, and high returns if successful. A decrease in venture capitalists’ cost of capital encourages firms to switch from safe strategies and bank finance to riskier strategies and venture capital finance, increasing the average risk of firms in the economy.     

Behavioural responses to employment discrimination: a study of Hong Kong workers

This study examines the behavioural responses of Hong Kong workers to employment discrimination. Based on the exit-voice framework proposed by Hirschman, five possible responses (i.e. neglect, quit, internal voice, external voice and litigation) are identified. The effects of certain personal attributes and work-related factors on these responses are evaluated. Two different data sets, focusing on gender discrimination and family status discrimination, are analysed. The results of logistic regression indicate that workers with higher levels of education and sensitivity to discrimination are more likely to complain and less likely to neglect their work or resign. Additionally, men and women respond differently to sex-based discrimination. Work-related factors such as employment sector, job tenure and employer size are also found to exert significant effects. The theoretical and practical implications of these findings are discussed.