Armando R. Gomes

Going Public without Governance: Managerial Reputation Effects

This paper addresses the agency problem between controlling shareholders and minority shareholders. This problem is common among public firms in many countries where the legal system does not effectively protect minority shareholders against oppression by controlling shareholders. We show that even without any explicit corporate governance mechanisms protecting minority shareholders, controlling shareholders can implicitly commit not to expropriate them. Stock prices of such companies are significantly higher and firms are more likely go public because of this reputation effect. Moreover, insiders divest shares gradually over time, at a rate that is negatively related to the degree of moral hazard. Copyright The American Finance Association 2000.

Sharing of Control as a Corporate Governance Mechanism

This paper identifies a new corporate governance mechanism: sharing control. We show that bargaining problems among multiple controlling shareholders may prevent inefficient investment decisions that harm minority shareholders. The same bargaining problems may block efficient investment decisions, though. By solving this trade-off, we show that the likelihood that shared control is efficient increases with three firm characteristics: overinvestment problems, the cost of verifying cash flows, and financing requirements. The model provides testable implications for the role that large shareholders play in corporate governance, contrasting shared control and monitoring as alternative governance mechanisms.

Multilateral Contracting with Externalities

This paper proposes a model for multilateral contracting, where contracts are written and renegotiated over time, and where contracts may impose externalities on other agents. Equilibria always exist and the equilibrium value function is linear and monotonically increasing on the contracts. If the grand coalition, or contracting among all agents, is inefficient, we show that bargaining delays arise in positive-externality games and equilibrium inefficiency may remain bounded away from zero even as bargaining frictions converge to zero. Otherwise, if the grand coalition is efficient, there are no bargaining delays, convergence to the grand coalition occurs in a finite number of contracting rounds, and the outcome becomes efficient as players become more patient. Copyright The Econometric Society 2005.

Why do public firms issue private and public securities

The market for public firms issuing private equity, debt, and convertible securities is large. Of the over 13,000 issues we examine, more than half are in the private market. Our results show asymmetric information plays a major role in the choice of security type within public and private markets and in the choice of market in which to issue securities. In the public market, firms’ predicted probability of issuing equity declines and issuing debt increases with measures of asymmetric information. There is a weak reversal of this sensitivity in the private market. We also find a large sensitivity of the choice of public versus private markets to asymmetric information, risk and market timing for debt, convertibles, and in particular, equity issues.

Mergers and Acquisitions: An Experimental Analysis of Synergies, Externalities and Dynamics

Mergers and acquisitions improve market efficiency by capturing synergies between firms. But takeovers also impose externalities (both positive and negative) on the remaining firms in the industry. This paper describes a new equilibrium concept designed to explain and predict takeovers in this setting. We experimentally compare the new equilibrium concept to that of competing concepts in situations without and with externalities. Moreover, we examine the predicted dynamics of takeovers and outcome implications of those dynamics. Our experimental results support the predictions of the new equilibrium concept and provide implications for further empirical tests.

Contracting with Externalities and Outside Options

This paper proposes a model of multilateral contracting where players are engaged in two parallel interactions: they dynamically form coalitions and play a repeated normal form game with temporary and permanent decisions. We show that when outside options are independent of the actions of other players all Markov perfect equilibrium without coordination failures are efficient, regardless of externalities created by interim actions. Otherwise, in the presence of externalities on outside options, all Markov perfect equilibrium may be inefficient. This formulation encompasses many economic models, and we analyze the distribution of coalitional gains and the dynamics of coalition formation in four illustrative applications.

Valuations and Dynamics of Negotiations

This paper analyzes three-party negotiations in the presence of externalities, deriving a close form solution for the stationary subgame perfect Nash equilibrium of a standard non-cooperative bargaining model. Players’ values are monotonically increasing (or decreasing) in the amount of negative (or positive) externalities that they impose on others. Moreover, players’ values are continuous and piecewise linear on the worth of bilateral coalitions, and are inextricably related to their negotiation strategies: the equilibrium value is the Nash bargaining solution when no bilateral coalitions form; the Shapley value when all bilateral coalitions form; or the nucleolus, when either one bilateral coalition among ‘natural partners’ or two bilateral coalitions including a ‘pivotal player’ form. jel: C71, C72, C78, D62.

A Theory of Negotiations and Formation of Coalitions

This paper proposes a new solution concept to three-player coalitional bargaining problems where the underlying economic opportunities are described by a partition function. This classic bargaining problem is modeled as a dynamic non-cooperative game in which players make conditional or unconditional offers, and coalitions continue to negotiate as long as there are gains from trade. The theory yields a unique stationary perfect equilibrium outcome-the negotiation value-and provide a unified framework that selects an economically intuitive solution and endogenous coalition structure. For such games as pure bargaining games the negotiation value coincides with the Nash bargaining solution, and for such games as zero-sum and majority voting games the negotiation value coincides with the Shapley value. However, a novel situation arises where the outcome is determined by airwise sequential bargaining sessions in which a pair of players forms a natural match. In addition, another novel situation exists where the outcome is determined by one pivotal player bargaining unconditionally with the other players, and only the pairwise coalitions between the pivotal player and the other players can form.

Multilateral negotiations and formation of coalitions

This paper studies multilateral negotiations among n players in an environment where there are externalities and contracts forming coalitions can be written and renegotiated. The negotiation process is modeled as sequential game of offers and counteroffers, and the study focus on the stationary subgame perfect equilibria, which jointly determines both the expected value of players, and the Markov state transition probability that encodes the path of coalition formation. The existence of equilibria is established, and Pareto efficiency is guaranteed if the grand coalition is efficient, despite the existence of externalities. The equilibria correspond to the solutions of a certain mixed nonlinear complementarity problem, a well-known problem in mathematical programming, which allow us to numerically obtain solutions using proven algorithms. Also, for almost all games (except in a set of measure zero) the equilibrium is locally unique and stable, and the number of equilibria is finite and odd. Global uniqueness does not hold in general (a public good provision example has seven equilibria) but a general sufficient condition for global uniqueness is derived. Using this sufficient condition, we show that there is a globally unique equilibrium in three-player superadditive games. Comparative statics analysis can be easily carried on using standard calculus tools, and some new insights emerge from the investigation of the classic apex and quota games.

Analyst Coverage Networks and Corporate Financial Policies

This paper shows that sell-side analysts play an important role in propagating corporate financial policy choices, such as leverage and equity issuance decisions across firms. Using exogenous characteristics of analyst network peers as well as the “friends-of-friends” approach from the network effects literature to identify peer effects, we find that exogenous changes to financial policies of firms covered by an analyst leads other firms covered by the same analyst to implement similar policy choices. We find that a one standard deviation increase in peer firm average leverage is associated with a 0.35 standard deviation increase in a firms leverage, and a one standard deviation increase in the frequency of peers’ equity issuance leads to a 29.6% increase in the likelihood of issuing equity. We show evidence that these analyst network peer effects are distinct from industry peer effects and are more pronounced among peers connected by analysts that are more experienced and from more influential brokerage houses.