In recent years financing through the creation of an independent project company or financing by ... more In recent years financing through the creation of an independent project company or financing by non-recourse debt has become an important part of corporate decisions. Shah and Thakor (JET, 1987) argue that project financing can be optimal when asymmetric information exists between firm's insiders and market participants. In contrast to that paper, we provide an asymmetric information argument for project
We analyze a model with two-dimensional asymmetric information where the employer has better info... more We analyze a model with two-dimensional asymmetric information where the employer has better information about the firm's earnings potential and the employee is subject to moral hazard. The employee's contract consists of an annual bonus and stock options. We focus on two issues: how different degrees of asymmetric information about short-term earnings versus long-term earnings affect optimal contracts and second, if a signalling equilibrium exists, what information concerning the firm's performance profile over time can be conveyed by the choice of contract. We show that if the extent of long-term (short-term) asymmetric information is larger, short-term (long-term) compensation prevails. With regard to signalling, we show that firms offering more options have higher short-term performance and lower long-term performance. This provides new insights into the structure of earnings-based compensation.
We build a model of an IPO for firms with private information about their earnings profile over t... more We build a model of an IPO for firms with private information about their earnings profile over time and test the model's predictions using a complete sample of newly listed Chinese companies between 1992 and 2007. The model predicts that IPO size is positively correlated with short-term operating performance that is not directly consistent with traditional theories. It also provides an explanation for negative correlation between debt and profitability that is not consistent with standard trade-off theory or signaling theory. The empirical results provide strong support for our model.
A recent wave of scandals in the corporate world has raised heated debates regarding the manipula... more A recent wave of scandals in the corporate world has raised heated debates regarding the manipulation of earnings by …rms' insiders. Existing literature usually considers earnings manipulation to be a negative social phenomenon and suggests measures for its elimination. In the present paper, we argue that earnings manipulation can be a part of the equilibrium relationships between …rms'insiders and outsiders. We consider an optimal contract between an entrepreneur and an investor where the entrepreneur is subject to a double moral hazard problem (one being the choice of production e¤ort and the other being intertemporal substitution, which consists of transferring cash ‡ows between periods). Investment and production effort may be below socially optimal levels because the entrepreneur cannot entirely capture the results of his e¤ort. The opportunity to manipulate earnings protects the entrepreneur against the risk of a low payo¤ when the results of production are low. Ex-ante, this provides an incentive for the entrepreneur to increase his level of e¤ort and invest e¢ ciently.
Existing literature on property rights stresses the e¤ect that distortions in future investment d... more Existing literature on property rights stresses the e¤ect that distortions in future investment decisions have on establishing the optimal property rights. This paper demonstrates that property rights may also be a¤ected by contracts which exist prior to the establishment of property rights. We consider a two-period model where a …rm's claimholders have contracts on current earnings and must determine the allocation of property rights on the …rm's residual assets. The allocation of these rights a¤ects the claimholders' incentives to undertake optimal …nancial decisions which simultaneously a¤ects current cash ‡ows and the …rm's residual value. We argue that property rights should be connected to the existing contracts through the rule of marginal revenues in order to mitigate the intertemporal substitution (earnings manipulation) problem.
Existing literature studies the e¤ect of asymmetric information on many aspects of debt …nancing ... more Existing literature studies the e¤ect of asymmetric information on many aspects of debt …nancing including debt maturity and seniority, collateral, liquidation rights, convertible debt, income bonds and sinking funds. Less is known about the e¤ect of asymmetric information on …rms'incentives to issue non-recourse debt (project …nancing). This paper is intended to shed new light on this issue. We analyze the choice between project …nancing and corporate …nancing when a …rm's insiders have private information about the qualities of the …rm's investment projects. Di¤erent informational structures and the resulting equilibria are considered. Empirical implications including new testable predictions are discussed.
This paper analyzes debt-equity choice for financing a two-stage investment when a firm’s insider... more This paper analyzes debt-equity choice for financing a two-stage investment when a firm’s insiders have private information about the firm’s expected earnings. When private information is one-dimensional (for example when short-term earnings are common knowledge while long-term earnings are private information) a separating equilibrium does not exist. When private information is two-dimensional a separating equilibrium may exist where firms with a higher rate of earnings growth issue debt and firms with a low rate of earnings growth issue equity. This provides new insights into the issue of different kinds of securities by different types of firms under asymmetric information as well as the link between debt-equity choice and operating performance.
We analyse a model with two-dimensional asymmetric information in which the employer has better i... more We analyse a model with two-dimensional asymmetric information in which the employer has better information about the firm's earnings potential. The employee's contract consists of an annual bonus and stock options. We explain (1) how different degrees of asymmetric information about short-term earnings versus long-term earnings affect optimal contracts and (2) why firms offering more options have higher short-term performance and lower long-term performance. This provides new insights into the structure of earnings-based compensation. noticed that a set-up where the principal (employer) has private information about strategic variables is interesting for analysing compensation-related issues. Existing literature on implicit contracts (pioneered by Azariadis, 1983) studies similar situations. This literature analyses the level of unemployment, the problem of wage rigidity and other macroeconomic questions. The structure of compensation contracts is not usually the focus.
We consider an optimal contract between an entrepreneur and an investor, where the entrepreneur i... more We consider an optimal contract between an entrepreneur and an investor, where the entrepreneur is subject to a double moral hazard problem (one being the choice of production e¤ort and the other being earnings manipulation). Since the entrepreneur cannot entirely capture the results of his e¤ort, investment is below the optimal level and production e¤ort is socially ine¢ cient. The opportunity to manipulate earnings protects the entrepreneur against the risk of a low payo¤ when production is unsuccessful. Ex-ante, this provides an incentive for the entrepreneur to increase investment and improve e¤ort.
Published online: jjj 8 Ó Springer-Verlag 2007 9 Becker and Fuest (J Econ 92, 2007) provides a ne... more Published online: jjj 8 Ó Springer-Verlag 2007 9 Becker and Fuest (J Econ 92, 2007) provides a new explanation for the link 10 between limited liability and corporate taxation. The authors argue that a cor-11 porate tax on all entrepreneurs with limited liability is optimal when entrepre-12 neurs can offset potential losses and when asymmetric information exists 13 regarding projects' qualities. This note considers a model with a slightly modified 14 production technology. It confirms that entrepreneurs' abilities to offset losses 15 and the existence of asymmetric information may affect government policy. 16 However, it also shows that the optimal taxation policy differs from that sug-17 gested by Becker and Fuest.
In recent years financing through the creation of an independent project company or financing by ... more In recent years financing through the creation of an independent project company or financing by non-recourse debt has become an important part of corporate decisions. Shah and Thakor (JET, 1987) argue that project financing can be optimal when asymmetric information exists between firm's insiders and market participants. In contrast to that paper, we provide an asymmetric information argument for project
We analyze a model with two-dimensional asymmetric information where the employer has better info... more We analyze a model with two-dimensional asymmetric information where the employer has better information about the firm's earnings potential and the employee is subject to moral hazard. The employee's contract consists of an annual bonus and stock options. We focus on two issues: how different degrees of asymmetric information about short-term earnings versus long-term earnings affect optimal contracts and second, if a signalling equilibrium exists, what information concerning the firm's performance profile over time can be conveyed by the choice of contract. We show that if the extent of long-term (short-term) asymmetric information is larger, short-term (long-term) compensation prevails. With regard to signalling, we show that firms offering more options have higher short-term performance and lower long-term performance. This provides new insights into the structure of earnings-based compensation.
We build a model of an IPO for firms with private information about their earnings profile over t... more We build a model of an IPO for firms with private information about their earnings profile over time and test the model's predictions using a complete sample of newly listed Chinese companies between 1992 and 2007. The model predicts that IPO size is positively correlated with short-term operating performance that is not directly consistent with traditional theories. It also provides an explanation for negative correlation between debt and profitability that is not consistent with standard trade-off theory or signaling theory. The empirical results provide strong support for our model.
A recent wave of scandals in the corporate world has raised heated debates regarding the manipula... more A recent wave of scandals in the corporate world has raised heated debates regarding the manipulation of earnings by …rms' insiders. Existing literature usually considers earnings manipulation to be a negative social phenomenon and suggests measures for its elimination. In the present paper, we argue that earnings manipulation can be a part of the equilibrium relationships between …rms'insiders and outsiders. We consider an optimal contract between an entrepreneur and an investor where the entrepreneur is subject to a double moral hazard problem (one being the choice of production e¤ort and the other being intertemporal substitution, which consists of transferring cash ‡ows between periods). Investment and production effort may be below socially optimal levels because the entrepreneur cannot entirely capture the results of his e¤ort. The opportunity to manipulate earnings protects the entrepreneur against the risk of a low payo¤ when the results of production are low. Ex-ante, this provides an incentive for the entrepreneur to increase his level of e¤ort and invest e¢ ciently.
Existing literature on property rights stresses the e¤ect that distortions in future investment d... more Existing literature on property rights stresses the e¤ect that distortions in future investment decisions have on establishing the optimal property rights. This paper demonstrates that property rights may also be a¤ected by contracts which exist prior to the establishment of property rights. We consider a two-period model where a …rm's claimholders have contracts on current earnings and must determine the allocation of property rights on the …rm's residual assets. The allocation of these rights a¤ects the claimholders' incentives to undertake optimal …nancial decisions which simultaneously a¤ects current cash ‡ows and the …rm's residual value. We argue that property rights should be connected to the existing contracts through the rule of marginal revenues in order to mitigate the intertemporal substitution (earnings manipulation) problem.
Existing literature studies the e¤ect of asymmetric information on many aspects of debt …nancing ... more Existing literature studies the e¤ect of asymmetric information on many aspects of debt …nancing including debt maturity and seniority, collateral, liquidation rights, convertible debt, income bonds and sinking funds. Less is known about the e¤ect of asymmetric information on …rms'incentives to issue non-recourse debt (project …nancing). This paper is intended to shed new light on this issue. We analyze the choice between project …nancing and corporate …nancing when a …rm's insiders have private information about the qualities of the …rm's investment projects. Di¤erent informational structures and the resulting equilibria are considered. Empirical implications including new testable predictions are discussed.
This paper analyzes debt-equity choice for financing a two-stage investment when a firm’s insider... more This paper analyzes debt-equity choice for financing a two-stage investment when a firm’s insiders have private information about the firm’s expected earnings. When private information is one-dimensional (for example when short-term earnings are common knowledge while long-term earnings are private information) a separating equilibrium does not exist. When private information is two-dimensional a separating equilibrium may exist where firms with a higher rate of earnings growth issue debt and firms with a low rate of earnings growth issue equity. This provides new insights into the issue of different kinds of securities by different types of firms under asymmetric information as well as the link between debt-equity choice and operating performance.
We analyse a model with two-dimensional asymmetric information in which the employer has better i... more We analyse a model with two-dimensional asymmetric information in which the employer has better information about the firm's earnings potential. The employee's contract consists of an annual bonus and stock options. We explain (1) how different degrees of asymmetric information about short-term earnings versus long-term earnings affect optimal contracts and (2) why firms offering more options have higher short-term performance and lower long-term performance. This provides new insights into the structure of earnings-based compensation. noticed that a set-up where the principal (employer) has private information about strategic variables is interesting for analysing compensation-related issues. Existing literature on implicit contracts (pioneered by Azariadis, 1983) studies similar situations. This literature analyses the level of unemployment, the problem of wage rigidity and other macroeconomic questions. The structure of compensation contracts is not usually the focus.
We consider an optimal contract between an entrepreneur and an investor, where the entrepreneur i... more We consider an optimal contract between an entrepreneur and an investor, where the entrepreneur is subject to a double moral hazard problem (one being the choice of production e¤ort and the other being earnings manipulation). Since the entrepreneur cannot entirely capture the results of his e¤ort, investment is below the optimal level and production e¤ort is socially ine¢ cient. The opportunity to manipulate earnings protects the entrepreneur against the risk of a low payo¤ when production is unsuccessful. Ex-ante, this provides an incentive for the entrepreneur to increase investment and improve e¤ort.
Published online: jjj 8 Ó Springer-Verlag 2007 9 Becker and Fuest (J Econ 92, 2007) provides a ne... more Published online: jjj 8 Ó Springer-Verlag 2007 9 Becker and Fuest (J Econ 92, 2007) provides a new explanation for the link 10 between limited liability and corporate taxation. The authors argue that a cor-11 porate tax on all entrepreneurs with limited liability is optimal when entrepre-12 neurs can offset potential losses and when asymmetric information exists 13 regarding projects' qualities. This note considers a model with a slightly modified 14 production technology. It confirms that entrepreneurs' abilities to offset losses 15 and the existence of asymmetric information may affect government policy. 16 However, it also shows that the optimal taxation policy differs from that sug-17 gested by Becker and Fuest.
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Papers by Anton Miglo