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Stapled Finance (with Paul
Povel). Download
or Download
from SSRN (being revised for resubmission to the Journal of Finance). |
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Abstract: Stapled Finance refers to a lending commitment
provided by an investment bank that is advising a seller in an M&A
setting. The key features are that whoever wins the bidding contest
has the option (but not the obligation) to accept the loan offer; and
the details of the loan are known in advance (loan size, interest rate,
etc.) Arranging stapled finance has become common, and it is taken up
by many private equity funds. This paper shows that it is not simply
a method to speed up an M&A transaction, or to eliminate the risk
of a deal falling through because the winning bidder cannot put together
a financing package. We show that the option of accepting a preapproved
loan affects the bidding, which becomes more competitive. The seller
benefits, because stapled finance increases the expected price. However,
the lender cannot expect to break even when offering stapled finance
and must be compensated for offering the loan. Even after doing so,
the net benefit of arranging stapled finance for the seller is strictly
positive. We also show that the benefits of stapled finance accrue only
if the pool of bidders includes financial buyers, for example LBO funds. |
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Personal Income Tax Cuts and Corporate Investment
(with Murray
Frank & Tracy
Wang). Download |
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Abstract:Personal income taxation affects the investment
by established firms differently than it affects potential startups.
It makes the established firm more aggressive than it would be in a
system with no personal income taxation, while the startup is less aggressive.
This can result in an entrepreneur deciding against starting a business
venture even when he or she would start the company in the absence of
personal income taxation. In imperfectly competitive markets, a cut
to dividend taxation is predicted to increase the number of start-up
firms, increase dividend payments by established firms and reduce investment
by established firms. These predictions match the observed actions of
US firms
around the 2003 dividend tax cut. |
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Can Transparency Be Too Much of a Good Thing?
(with Vijay
Yerramilli). Download
from SSRN |
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Abstract: A firm's shareholders
can choose disclosure policies to make the firm more or less transparent
to capital market participants. In this paper, we develop a simple model
of corporate investing to show that an increase in transparency that
leads to more informed market scrutiny of the firm is not always value-enhancing
for the firm. Firms with strong growth opportunities benefit the most
from an increase in transparency; by providing an independent signal
on firm quality to the stock market, market scrutiny allows such firms
to focus more on maximizing firm value instead of worrying about short-term
returns. On the other hand, firms that derive their value mainly from
current investments would actually benefit by reducing transparency
and consequently attracting reduced market scrutiny; for such firms,
the gains from shirking investments far outweigh the gains from improving
short-term returns. Interestingly, even for firms that gain from an
increase in transparency, perfect transparency is not value-enhancing,
i.e., some degree of opaqueness is desirable. Several empirical implications
of these results are also developed. |
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Information content of Put Warrant Issues
(with Scott
Gibson and Paul Povel).
Download from SSRN. |
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Abstract: We show that put warrant
issues can be used to signal a firm's superior prospects to a market
that is not aware of them. One benefit of using put warrants to signal,
particularly for growth firms, is that a firm receives cash when sending
the signal, instead of paying out cash. We establish conditions under
which put warrants are issued in a separating equilibrium. We then test
our theory using a new data set on put warrant issues. The data support
our model: put warrant issuers strongly outperform their peers in the
years after the put warrant issues. |
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Corporate Disclosures: Strategic Donation of Information
(with Jhinyoung Shin),
Download from SSRN. |
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Abstract: In this paper we model
a corporate manager's choice of a disclosure regime. In a model in which
disclosure has no efficiency gains like reduced cost of capital, no
legal implications, and no signaling motivations, we show that a manager
may choose to disclose payoff-relevant information as a means of maximizing
her trading profits. This truthful disclosure is done pre-trade and
is beneficial to the manager as it erodes the informational advantage
of other traders with private information. This new rationale for public
disclosure needs to be empirically tested by examining the trades of
managers after, and not before, public disclosures. |
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Behavior Towards Risk with Non-Tradable Commodities
(with Hyeng Keun Koo). Download. |
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Abstract: We study risk aversion
of an agent whose consumption bundle consists of more than one commodity,
some of which might be non-tradable. We show that the Stiglitz coe±cient
of absolute risk aversion generally increases when a subset of commodities
is non-tradable. |
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Mutual Fund Structure and the Pricing of Liquidity
(with
Vikram Nanda).
Download from SSRN. |
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Abstract: The paper develops an
equilibrium model in which both the structure of mutual funds and the
liquidity premium on a traded security are determined endogenously.
The setting is one in which investors, subject to liquidity shocks,
choose whether to invest directly in the security, invest via mutual
funds or stay with cash. Mutual funds, by pooling across investors,
emerge as an efficient way for investors with greater liquidation costs
to invest -- by diversifying uncorrelated liquidity shocks, minimizing
the impact of systematic shocks by optimal asset allocation and by enabling
investors to commit to ex-post transfers across investors with different
liquidity realizations. Alternative fund structures may be optimal depending
on fund efficiency and other model parameters. In the equilibrium in
which some investors hold the security directly and others hold mutual
fund shares or cash, it is shown that mutual funds emerge as the marginal
investors in the security, thereby determining its price and liquidity
premium. In the presence of mutual funds, the liquidity premium is shown
to be relatively insensitive to increases in the supply of the security,
unlike the situation when mutual funds are absent. It is shown that
improvements in fund efficiency will tend to result in fund structures
with lower penalties for early withdrawal, a reduction in the security
liquidity premium and an increase in the size of the fund industry.
An interesting feature is that relatively small improvements in fund
efficiency can result in large changes in the size of the mutual fund
industry, accompanied by changes in fund structure -- which, we argue,
is consistent with recent experience. The model is used to generate
empirical predictions and to discuss policy and welfare implications. |
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