Journal of Labor Economics19864(3, Part 1), 341-354
Aggregate data exhibit procyclical movement in the rate of turnover. However, existing models of turnover have been unable to explain this phenomenon. In this model I generate turnover as an outcome of a second-best wage contract when there is asymmetry of information about workers' mobility costs. A wage contract that insures the "bad" ("unlucky") workers results in "good" ("lucky") workers earning less than their marginal productivity. Therefore, good workers with low mobility costs leave the firm for the spot market wage. This, combined with an aggregate shock, results in a procyclical rate of turnover.
We consider the bankruptcy law and workout practices in the United States and model bankruptcy as a strategic decision. We analyze a firm's choice between liquidation under Chapter 7, renegotiation of the debt contract in a workout, and reorganization under Chapter 11 of the bankruptcy code. Our premise is that a financially distressed firm chooses its action in order to minimize the loss in value caused by the well-known over- and under-investment problems. We show that the firm initiates a workout when it faces under-investment, and commences Chapter 11 when it faces over-investment. Some of the results are: (i) in default, total firm value and equity value increase upon the announcement of a workout and decrease upon the announcement of Chapter 11; (ii) firms with shorter maturity of debt are more likely to reorganize in a workout; (iii) among the firms that renegotiate their debt contract, the proportion of firms entering Chapter 11 is higher for firms in mature industries than for firms in growth industries.
This article presents a theory of capital allocation that shows how the use of net present value (NPV) as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria, like the internal rate of return and the profitability index. The essence of our theory is rooted in the mainstream paradigm of corporate finance: while firms use NPV to measure the addition to firm value from prospective projects, "classical" informational and agency considerations prevent it from implementing the optimal capital budgeting outcome. Our theory also identifies conditions when alternative criteria should be used. Finally, we characterize when direct monitoring through capital budgeting dominates compensation contracts in alleviating the agency problem.
This article presents a theory of capital allocation that shows how the use of net present value (NPV) as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria, like the internal rate of return and the profitability index. The essence of our theory is rooted in the mainstream paradigm of corporate finance: while firms use NPV to measure the addition to firm value from prospective projects, "classical" informational and agency considerations prevent it from implementing the optimal capital budgeting outcome. Our theory also identifies conditions when alternative criteria should be used. Finally, we characterize when direct monitoring through capital budgeting dominates compensation contracts in alleviating the agency problem.
[We model fundamental differences across economic systems and propose optimal bankruptcy laws. We show that creditor-debtor relationships in a given economy are affected by the ability of creditors to obtain information about fundamentals and the managers' ability to strategically use their private information. An optimal bankruptcy law utilizes creditors' information while minimizing managers' use of strategic information. Our proposed laws for a developed bank-based system like Germany include a creditor chapter only, for a developed market-based system like the United States include both a creditor chapter and a debtor chapter, and for an underdeveloped system include both a creditor chapter and a debtor chapter that gives the manager more protection than in a market-based system.]
We study the design of internal control and capital structure. We pose the question, When is control allocated only to shareholders and when is it allocated to other stakeholders, such as debtholders, or the management team? We show that shareholders (debtholders) get control when the firm’s cash flow is relatively sensitive (insensitive) to managerial effort. Our theory implies that the signs of the correlations between endogenous variables when shareholders have absolute control are reversed when debtholders have veto power. In particular, debt level and firm value are negatively (positively) correlated when debtholders have veto power (shareholders have absolute control).
[We study the design of internal control and capital structure. We pose the question, When is control allocated only to shareholders and when is it allocated to other stakeholders, such as debtholders, or the management team? We show that shareholders (debtholders) get control when the firm's cash flow is relatively sensitive (insensitive) to managerial effort. Our theory implies that the signs of the correlations between endogenous variables when shareholders have absolute control are reversed when debtholders have veto power. In particular, debt level and firm value are negatively (positively) correlated when debtholders have veto power (shareholders have absolute control).]
[We develop a model of the acquisition market in which the acquirer has a choice between two takeover mechanisms: mergers and tender offers. A merger is modeled as a bargaining game between the acquiring and target firms; whereas a tender offer is modeled as an auction in which bidders arrive sequentially and compete for the target. At any stage of the bargaining game the acquiring firm can stop negotiating and make a tender offer. In equilibrium, there is a unique level of synergy gains below which the acquiring firm makes only a merger attempt as it expects to lose in the competition resulting from a tender offer. For synergy gains above this level, tender offers can occur. However, to get tender offers, target shareholders must give their managers golden parachutes that give higher payoffs in tender offers than in mergers.]
We develop a model of the acquisition market in which the acquirer has a choice between two takeover mechanisms: mergers and tender offers. A merger is modeled as a bargaining game between the acquiring and target firms; whereas a tender offer is modeled as an auction in which bidders arrive sequentially and compete for the target. At any stage of the bargaining game the acquiring firm can stop negotiating and make a tender offer. In equilibrium, there is a unique level of synergy gains below which the acquiring firm makes only a merger attempt as it expects to lose in the competition resulting from a tender offer. For synergy gains above this level, tender offers can occur. However, to get tender offers, target shareholders must give their managers golden parachutes that give higher payoffs in tender offers than in mergers.