Neal M. Stoughton

Financial disclosure policy in an entry game

Abstract This paper analyzes incentives for voluntary disclosure of proprietory information. Proprietory information, if disclosed, provides strategic information to potential competitors, but can be helpful to the financial market in valuing the firm more accurately. Focusing on a stylized model of a static entry game, we show that a fully revealing disclosure equilibrium exists when the prior of the market is optimistic or the entry cost is relatively low. When the prior is pessimistic or the entry cost is high, however, both non- and partial-disclosure equilibria obtain. Our analysis predicts that competition in the product market encourages voluntary disclosure.

IPO-mechanisms, monitoring and ownership structure

This paper analyzes the e⁄ect of di⁄erent IPO mechanisms on the structure of share ownership and explores the role of underpricing and rationing in determining investors’ shareholdings. We focus on the agency problem that results when large institutions are the only investors capable of monitoring the firm whereas small shareholders free-ride on these activities. The major conclusion is that some well-known aspects of IPOs may be explained as rational responses by the issuer to the existence of regulatory constraints in public capital markets. There is a two-stage o⁄ering mechanism in which the investment banker, acting in the interests of the issuer, optimally rations the allotment of shares to small investors in order to capture the benefits associated with better monitoring by institutions. Importantly, in our model, the existence of underpricing (and oversubscription) is an indication that the issuer has received a higher ex ante price than would have been obtained through a competitive Walrasian-type o⁄ering process. ( 1998 Elsevier Science S.A. All rights reserved. JEL classification: G24; G32; G38

A Bargaining Approach to Profit Sharing in Joint Ventures

Profit-sharing arrangements in joint ventures are analyzed as a Bayesian bargaining game between two parents with incomplete information about each others cost function for inputs provided. Using the mathematics of mechanism design, this article explores the sensitivity of the bargaining agreement to the timing of private information about costs. A condition on demand and costs is derived under which the balanced budget constraint does not preclude the joint venture from achieving an ex post efficient level of production. The proposed mechanism is then extended to the second-best environment under the criteria of (1) ex ante optimality and (2) R. B. Myersons axiomatic neutral bargaining solution. The direct revelation mechanisms are interpreted as corresponding indirect transfer-pricing mechanisms. A major result is that, in all cases, the outcome calls for equal allocation of realized joint venture net profit. Copyright 1989 by the University of Chicago.

Simulation-Based Load Synthesis Methodology for Evaluating Load-Management Programs

A physically-based methodology for synthesizing the hourly residential heating, ventilation, and air-conditioning (HVAC) load was developed and tested against the data from a utility. The method, which is coded in FORTRAN IV, is currently operational. It involves a simulation model and a newly-developed load-diversification? model. The simulation model captures the thermodynamic principles of building structures. The load-diversification model estimates the diversified load from a limited number of load shapes of individual households. Because of the physically-based nature of the method, it could be used to analyze the resulting changes in load shapes due to load- management technologies (e.g. cycling of air-conditioners, water storage heating and cooling system, ceramic brick storage system). The load-synthesis method also provides an efficient procedure to analyze the effect on the system load due to different penetrations of load-management technologies. Resulting load shapes could be led into a generation (G) expansion model and a transmission and distribution (T&D) model to assess the impacts on the utilitys planning. This methodology, which has been validated against the metered data of a midwestern utility, is a cost- effective tool with predictive capability for evaluating load-management programs.

Direct Construction of Optimal Generation Mix

A model has been developed for planning the generation mix of a power system at some target year. This optimal target mix algorithm extends the classical screening curves approach to recognize capacity constraints on existing units and it utilizes the mathematical properties of the optimal solution to recursively construct the generation mix. Not only is the method computationally efficient but it also provides conceptual insight into the economic worth of existing units. A series of snapshot optimization decisions using this algorithm has been implemented to develop long-range generation expansion plans. Two case studies illustrating the snapshot procedure on sample power system data are described.

A mechanism design approach to transfer pricing by the multinational firm

Abstract This paper is about how multinationals choose transfer prices and optimal production levels in the presence of differential corporate income tax rates and local ownership requirements. A key featrure of the model is that there is an asymmetric information problem between a parent and its foreign subsidiary. We examine the interaction between ownership structure, corporate taxes and bargaining power. Transfer prices induce underproduction compared to the full-information case when the parent has the bargaining ability. When bargaining is controlled by the subsidiary, overproduction obtains. The model is used to illustrate how governmental objectives can be accomplished without direct regulation of the transfer price.

Managerial Bargaining Power in the Determination of Compensation Contracts and Corporate Investment

This paper considers the design of managerial compensation contracts and their impact on corporate investment decisions and the managerial effort decision. The model relates the compensation scheme to outside share ownership and managerial bargaining position. Using the methods of mechanism design under asymmetric information, a shift in favor of effort is documented in the case where managerial bargaining strength is weak, while a shift toward more use of capital investment results from strong managerial bargaining power. The model distinguishes managerial equity holdings from contingent compensation contracts. Our results are related to the empirical literature on pay-performance sensitivities. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

The Information Content of Corporate Merger and Acquisition Offers

This paper explores the implications for the information content of acquisition offers in an economy with asymmetric information. It is shown that mergers can be socially beneficial due to risk reduction and information asymmetry even when there are no productive syn? ergies and when positive premia are paid. The properties of equilibria with and without mergers are derived and contrasted in order to obtain a quantitative bound on potential merger premia. Theory is related to empirical evidence, where our results show that ag? gregate valuation gains can accrue on a purely informational basis. Moreover, the model developed here has important implications for the reported differences in tender offer and merger studies.

Strategic Mutual Fund Tournaments

This paper characterizes the optimal strategies of mutual fund managers competing in a multi-period winner-take-all tournament. Taking account of both multiple periods and competition between more than two managers, the optimal strategies are contingent on the state at the interim date. In the final period all managers maximize the amount of risk that they add to their portfolios with the exception of the leading fund. This fund locks in its advantage by reducing risk only if it has a sufficiently large lead. Empirically, we find that consistent with the theory, funds with larger leads decrease risk; however trailing funds do not increase risks. These results are robust to using different ways of controlling for systematic risk exposures.

A Survey of University Endowment Management Research

There is significant interest in how university endowments manage money and perform, and an emerging strand of finance research specializes in this growing area. The purpose of this paper is to survey and review the state-of-the-art in this field. We classify papers into four areas. (1) asset allocation, where we discuss the main theoretical framework and the relevant observations both across time and across types of endowment; (2) performance, where (risk-adjusted) performance is discussed and distinguished by type and size of endowment; (3) spending, where the relation to the classical views and theoretical literature is reviewed as well as what university endowments do in practice; (4) organization, where governance structure and the investment policy statement are discussed. We find that the modern framework for theoretical and empirical analysis can provide a very useful perspective for understanding the role of endowments. Nonetheless we highlight areas where more work remains to be done.