Knowledge that Transforms

This paper provides a framework to analyze voluntary and mandatory disclosure. Since improved disclosure reduces the entrepreneur's ability to extract private benefits, it secures funding for new investments, but also provides existing claimholders with a windfall gain. As a result, the entrepreneur may choose to forgo investment in favor of extracting more private benefits. A mandatory disclosure standard reduces inefficient extraction and increases investment efficiency. Although the optimal standard is higher than the entrepreneur's optimal choice, it can be less than complete in order not to deter investment. The model also shows that better legal shareholder protection goes together with higher disclosure standards and that harmonization of disclosure standards may be detrimental.

The debate over the potential procyclicality of bank capital requirements under Basel II has focused overwhelmingly on peak-to-trough variation in minimum regulatory requirements. In this paper, we re-examine the problem from the perspective of market discipline. First, we show that the marginal impact of introducing Basel II depends strongly on the extent to which market discipline leads banks to vary lending standards procyclically in the absence of binding regulation. Second, we evaluate policy options not only by their efficacy in dampening cyclicality in capital requirements, but equally by how well the information value of Basel II market disclosures is preserved.

This paper examines empirically the hypothesis that market discipline is effective in providing incentives for banks to limit their risk of default, by holding capital buffers against adverse outcomes in portfolio risk. We have constructed a large cross-country panel data set consisting of observations on 729 individual banks from 32 different countries over the years 1993 to 2000. Theory implies that the strength of market discipline ought to be related to the extent of the government safety net, the observability of bank risk choices and to the proportion of uninsured liabilities in the bank's balance sheet. Using panel data techniques, we test whether these factors provide incentives for banks to hold larger capital buffers against adverse outcomes in portfolio risk. Our results suggest that government safety nets result in lower capital buffers and that stronger market discipline resulting from uninsured liabilities and disclosure results in larger capital buffers, all else equal. While our results therefore point to the effectiveness of market discipline mechanisms in general, we also find that the effect of disclosure and uninsured funding is reduced when banks enjoy a high degree of government support. Our results finally suggest that while competition leads to greater risk taking incentives, market discipline is more effective in curbing these incentives in countries where competition among banks is strong.

Empirical evidence suggests that better-informed investors in bookbuilt IPOs submit more informative bids and receive better allocations than do investors with less precise information. While the traditional bookbuilding argument accounts for this evidence as better-informed investors being rewarded with more favorable allocations for providing more useful information, the present paper adopts the winner's curse argument and shows that better-informed investors get better allocations by being better able to pick underpriced issues, even though in equilibrium investors' bids fully reveal their information. The paper offers empirical implications that allow the two arguments to be separated.

This paper investigates whether shareholder lockup agreements in France and Germany mitigate problems of agency and asymmetric information. Despite minimum requirements in terms of the length and percentage of shares locked up, lockup agreements are not only highly diverse across firms but also across the different shareholders of a single firm as most firms have different agreements in place for executives, non-executives and venture capitalists. The diversity across firms and types of shareholders can be explained by firm characteristics—such as the level of uncertainty—as well as the type and importance of each shareholder within the firm.

We study financial intermediation in which sufficient sorting is impossible. We identify a new type of market failure that may occur even when returns of investing entrepreneurs are verifiable. Moreover, we suggest that the nature of competition determines the contracts banks offer. A monopoly bank will offer equity contracts. In any pure strategy equilibrium when lenders compete à la Bertrand, however, only debt contracts are offered.

This paper examines the effects of macroeconomic announcements on equity index markets using high frequency transactions data for the regular and E-mini S&P 500 index futures contracts. For ten types of announcements that significantly affect prices, we analyze the price adjustment process and the trading patterns of exchange locals and off-exchange customers around the announcements. We find a large increase in trading activity immediately after the announcement. The results also show that during this initial surge in trading activity, locals are able to time their trades better than off-exchange traders even when locals do not have the advantage of access to the order flow. The trading strategy followed by exchange locals in the first 20 seconds after the announcement tends to be profitable, while off-exchange traders tend to make losing trades over the same time period. These results lend evidence that local traders tend to react to the macroeconomic information faster than off-exchange traders.

We examine the change in the value of the underlying stock associated with long-term option introduction. Analysis of the abnormal returns associated with LEAPS (Long-Term Equity Anticipation Security) introductions indicates a decline in firm value even after we control for the endogenous nature of the listing decision. However, the evidence does not support previously-offered explanations for the price change associated with option introductions. In particular, we do not find the predicted relations between the cumulative abnormal returns and variables associated with loosening of short sale constraints such as beta, proxies for the dispersion in investor beliefs, and change in relative short interest.