Alex Stomper

Capital Structure, Information Acquisition and Investment Decisions in an Industry Framework

This paper analyzes the relationship between a firms capital structure and its information acquisition prior to capital budgeting decisions. It is found that low-growth industries can sustain a large number of levered firms. In these industries, leverage is negatively related to a firms incentive to acquire information during the capital budgeting process. In contrast, high-growth industries only sustain a small number of levered firms. In these industries, levered firms acquire more information than all-equity financed firms. The model yields empirical predictions regarding the effects of leverage on the expected amount and the volatility of corporate investment.While leverage does not affect firm value, highly levered firms generate a more volatile cash flow than firms with low debt levels. JEL classification codes: G31, G32.

Why Leverage Affects Pricing

We explain and provide evidence for effects of leverage on pricing. Our model identifies two effects that either counteract or reinforce each other, depending on the debt maturity structure: (i) firms set higher prices (underinvest in market share) if they have more debt, and (ii) firms engage in dynamic risk-shifting by setting lower (higher) prices if the current debt obligation will be higher (lower) in the next period than in the present period. Using a unique dataset of owner-managed hotels in Austrian ski resorts, we provide empirical evidence of both effects. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

The Politics of Related Lending

We analyze the profitability of government-owned banks’ lending to their owners, using a unique data set of relatively homogeneous government-owned banks; the banks are all owned by similarly structured local governments in a single country. Making use of a natural experiment that altered the regulatory and competitive environment, we find evidence that such lending was used to transfer revenues from the banks to the governments. Some of the evidence is particularly pronounced in localities where the incumbent politicians face significant competition for reelection.

Primary Market Design: Direct Mechanisms and Markets

We develop a model that allows for the coexistence of bookbuilding and when-issued trading. We show that, due to interactions between these two processes, allowing for when-issued trading is for the most part beneficial for issuers. When-issued trading may interfere with information gathering thorough bookbuilding, in the case that informative bookbuilding is not needed. However, informative bookbuilding may be a prerequisite for the when-issued market to function. In this case the existence of a liquid when-issued market will not interfere with information gathering through bookbuilding, and will strictly benefit the issuer.

Primary Market Design in the Presence of When-Issued Markets

We analyse the pricing and allocation of unseasoned securities by means of mechanisms such as auctions or bookbuilding. Our analysis allows the pricing and allocation rules to be based not only on investors’ bids, but also on information revealed through pre-issue trading of the securities in a when-issued or betting market. The results explain why mechanisms for pricing equity securities typically allow information from pre-issue markets to affect the issue price, while those for pricing Treasuries do not.

Conditioning and Updating Under Cumulative Prospect Theory

Under expected utility theory, unconditional expected utility can be decomposed into a weighted sum of conditional expected utilities where the weights are marginal probabilities. We derive necessary and sufficient conditions for a similar decomposition in the framework of Cumulative Prospect Theory (CPT). The conditions also ensure that a decision maker’s conditional preferences (given some event) remain within the CPT class. Our results are important for empirical analyses in which weighted marginal probabilities of events are used to explain a decision maker’s choices. The use of such marginal probabilities is a practical necessity in non-experimental settings.

Corporate Governance, Ownership, and Board Structure in Austria

This paper presents empirical evidence concerning the ownership- and board structure of Austrian companies and relates these findings to the literature on corporate governance. In particular, many contributions to this literature highlight the lack of shareholder monitoring of the management of companies with a dispersed ownership structure which arises due to shareholders’ incentive to “free-ride” on other shareholders’ monitoring activities.