Marcus M. Opp

Target Revaluation after Failed Takeover Attempts - Cash versus Stock

We provide evidence that a significant fraction of the returns to merger announcements reflects target revaluation rather than the causal effect of the merger. In a sample of unsuccessful merger bids from 1980 to 2008, targets of cash offers are revalued by +15% after deal failure, whereas stock targets revert to their pre-announcement levels. Importantly, this result holds for the subsample where deal failure is exogenous to the target’s stand-alone value. Since cash targets are also not differentially related to future takeover offers, we conclude that cash deals signal positive information about the stand-alone value of the target. We also show that cash bidders revert to their pre-announcement levels, while stock bidders fall below. Our revaluation estimates imply economically large adjustments of naive stock-market-based synergy estimates.

Impatience versus Incentives

This paper studies the dynamics of long‐term contracts in repeated principal–agent relationships with an impatient agent. Despite the absence of exogenous uncertainty, Pareto‐optimal dynamic contracts generically oscillate between favoring the principal and favoring the agent.

Higher Capital Requirements, Safer Banks? Macroprudential Regulation in a Competitive Financial System

In this paper we propose a general equilibrium framework to analyze the effectiveness of bank capital regulations when the banking sector faces competition from unregulated investors. In our model an implicit bail-out guarantee for banks may generate excessive incentives to invest in high risk, negative NPV projects. When competition from unregulated investors is low, the banking sector has a natural incentive to first fund positive NPV projects and to only engage in risk-shifting when the banking sector’s funding capacity exceeds the supply of positive NPV projects. This “natural pecking order” of bank investment allows regulation in the form of simple equity-capital ratio requirements to be effective. However, when banks face sufficiently strong competition from unregulated investors, they weakly prefer to focus on the funding of high-risk issuers, since government-insured banks have a natural comparative advantage in that market. This “reverse pecking order” of bank investment renders simple capital regulation to be ineffective and may even cause equity injections to be locally counterproductive. However, we show that contingency of capital regulation on credit ratings can restore the natural pecking order of bank investment and thereby increase the efficiency of capital requirements. ∗Previous versions of this paper circulated under the titles ”Optimal Rating-Contingent Regulation” and ”Regulating Banks’ Risk Taking with External Risk Assessments.” We are grateful to Sam Lee for a thoughtful discussion of an earlier draft of this paper. In addition, we thank seminar participants at the Federal Reserve Bank of New York and at the Federal Reserve Board of Governors. †University of Chicago, Booth School of Business, e-mail: milt@chicagobooth.edu. Professor Harris thanks the Center for Research in Security Prices at the University of Chicago Booth School of Business for financial support. ‡University of Pennsylvania, The Wharton School, email: opp@wharton.upenn.edu. Research support from the Rodney White Center for Financial Research and the Wharton School Dean’s Research Fund is gratefully acknowledged. §University of California, Berkeley (Haas), email: mopp@haas.berkeley.edu.

Markup Cycles, Dynamic Misallocation, and Amplification

We develop a tractable dynamic general equilibrium model of oligopolistic competition with a continuum of heterogeneous industries. Industries are exposed to aggregate and industry-specific productivity shocks. Firms in each industry set value-maximizing state-contingent markups, taking as given the behavior of all other industries. When consumers are risk-averse, industry markups are countercyclical with regards to the industry-specific component, but may be procyclical with regards to the aggregate shock. The general equilibrium dispersion of markups implied by the optimization of heterogeneous industries creates misallocation of labor across industries. The misallocation, in turn, generates aggregate welfare losses state-by-state that feed back into the industry problem via a representative agents marginal utility of aggregate consumption. Misallocation dynamics may transmit industry-specific shocks, or amplify small aggregate shocks, and so lead to aggregate fluctuations through these feedback effects.

Impatience vs. Incentives

This paper studies the long-run dynamics of Pareto-optimal self-enforcing contracts in a repeated principal-agent framework with differential discounting. Impatience concerns encourage contracts to favor the more patient player in the long run, and incentives concerns encourage contracts to favor the agent in the long run. When the agent is relatively impatient, the impatience and incentives forces are in conflict. If the conflict is strong, we show that optimal contracts oscillate between favoring the principal and favoring the agent as a way to cater to both forces in the long-run. This occurs in the absence of uncertainty or any need to randomize. When the impatience and incentives forces are aligned or one force dominates the other, we show that every optimal contract converges to a steady state in the long run in a well-behaved way. The results of Ray (2002) and Lehrer and Pauzner (1999) can be recovered as limiting cases.

Only Time Will Tell: A Theory of Deferred Compensation and its Regulation

This paper provides a complete characterization of optimal contracts in principal-agent settings where the agents action has persistent effects. We model general information environments via the stochastic process of the likelihood-ratio. The martingale property of this performance metric captures the information benefit of deferral. Costs of deferral may result from both the agents relative impatience as well as her consumption smoothing needs. If the relatively impatient agent is risk neutral, optimal contracts take a simple form in that they only reward maximal performance for at most two payout dates. If the agent is additionally risk-averse, optimal contracts stipulate rewards for a larger selection of dates and performance states: The performance hurdle to obtain the same level of compensation is increasing over time whereas the pay-performance sensitivity is declining. We derive a rich set of testable implications for the optimal duration of (executive) compensation and the maturity structure of claims in financial contracting settings.

The System-Wide Effects of Bank Capital Regulation on Credit Supply and Risk-Taking

We propose a tractable general equilibrium framework to analyze the eectiveness of bank capital regulations when banks face competition from public markets. Our analysis shows that increased competition can not only render previously optimal bank capital regulations ineective but also imply that, over some ranges, increases in capital requirements cause more banks to engage in value-destroying risk-shifting. Our model generates a set of novel implications that highlight the dependencies between optimal bank capital regulation and the comparative advantages of various players in the nancial system.

Bank Capital and the Composition of Credit

We propose a tractable general equilibrium framework to analyze the eectiveness of bank capital regulations when banks face competition from public markets. Our analysis shows that increased competition can not only render previously optimal bank capital regulations ineective but also imply that, over some ranges, increases in capital requirements cause more banks to engage in value-destroying risk-shifting. Our model generates a set of novel implications that highlight the dependencies between optimal bank capital regulation and the comparative advantages of various players in the nancial system.

Bank Capital, Risk-Taking, and the Composition of Credit

We propose a tractable general equilibrium framework to analyze the eectiveness of bank capital regulations when banks face competition from public markets. Our analysis shows that increased competition can not only render previously optimal bank capital regulations ineective but also imply that, over some ranges, increases in capital requirements cause more banks to engage in value-destroying risk-shifting. Our model generates a set of novel implications that highlight the dependencies between optimal bank capital regulation and the comparative advantages of various players in the nancial system.

Industrial Asset Pricing with Endogenous Business Cycles

We develop a dynamic general equilibrium model with many different industries, in which firms set prices strategically in product markets. Our approach extends previous literature by endogenizing the market price of risk and allowing for more general risk structures. General equilibrium in the model is shown to exist under general conditions. Strategic interaction between firms amplifies business cycles, small changes in long-term growth rates can have drastic effects on the equilibrium outcome, whereas temporary changes in productivity have marginal impact, and the overall competitiveness of the economy only depends on long-term growth. A firms expected returns are affected by the industrial environment in which it operates, in line with what has been observed in the empirical literature. Overall, our model suggests that industry characteristics should be informative about the expected returns of individual firms over the business cycle.