Andres Almazan

Why Constrain Your Mutual Fund Manager

We examine the form, adoption rates, and economic rationale for the investment restrictions found in the contracts between mutual fund investors and managers. Based on a sample of U.S. domestic equity funds from 1994 to 2000, we find systematic patterns in the use of policy constraints that are consistent with an optimal contracting view of the fund industry. In particular, restrictions are more frequently present when it is relatively less beneficial to use direct methods to monitor manager behavior, including when (i) boards contain a higher proportion of inside directors, (ii) the portfolio manager is more experienced, (iii) the fund is managed by a team rather than an individual, and (iv) the fund does not belong to a large organizational complex. We find no evidence that low- and high-constraint funds produce different risk-adjusted returns, which is also consistent with the existence of a contracting equilibrium.

Entrenchment and Severance Pay in Optimal Governance Structures

This paper explores how motivating an incumbent CEO to undertake actions that improve the effectiveness of his management interacts with the firms policy on CEO replacement. Such policy depends on the presence and the size of severance pay in the CEOs compensation package and on the CEOs influence on the board of directors regarding his own replacement (i.e., entrenchment). We explain when and why the combination of some degree of entrenchment and a sizeable severance package is desirable. The analysis offers predictions about the correlation between entrenchment, severance pay, and incentive compensation.

Firm Investment and Stakeholder Choices: A Top-Down Theory of Capital Budgeting

This paper considers the optimal design of capital budgeting rules when the firm’s capital budgeting process involves the interaction of top executives, with private information and stakeholders (e.g., employees) whose motivation and efforts affect the likelihood of the firm’s success. In this setting, the decisions of top executives affect stakeholders’ inferences about firms’ prospects and as a result, influence their actions. Specifically, higher levels of investment expenditures indicate that a firm has promising prospects and induce stakeholders to take actions that contribute to the firm’s success. Within this framework we examine the role of commonly observed capital budgeting rules which not only play their traditional allocative role but also affect how private information is transmitted from the top down. As we show, the optimal capital budgeting mechanism is consistent with a number of commonly observed investment distortions such as capital rationing, investment rigidities, overinvestment, and inflated discount rates.

Securitization and Banks’ Capital Structure

Asset securitization offers banks the possibility of altering their capital structures and the financial intermediation process. This study shows that the introduction of securitization is associated with fundamental changes in the funding policies of banks. In particular, we present evidence of more intense use of securitization by banks (i) with stronger growth opportunities; (ii) with liquidity constraints; (iii) with costlier alternative sources of funding; and (iv) with restricted access to capital markets owing to adverse selection. Securitization is also observed to be higher on the pecking order of financing choices of small and medium-sized banks and non-listed banks, which are likely to face more severe adverse selection problems