Pegaret Pichler

Structuring the Initial Offering: Who to Sell to and How to Do it

We develop a unified model of the issuer’s decisions that takes into account both mechanism design and adverse selection risk. The model enables us to determine the optimal amount of information gathering prior to setting the offer price, and to understand what does and does not cause underpricing. The flexibility to allocate securities between a pool of investors who provide pricingrelevant information and investors who do not provide information is key to controlling underpricing. Policies that guarantee a minimum allocation to investors in the pool result in underpricing; policies that cap the allocations to such investors do not. The optimal number of investors in the pool, and thus the amount of information acquired, generally increases with the riskiness of the issue. However, this relation breaks down if pool members are guaranteed minimum allocations. Copyright Oxford University Press 2006

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.

Optimal Contracts for Teams of Money Managers

The optimal organizational form and optimal incentive contract are characterized for a team of money managers, assuming that the investor (principal) is risk averse and that each managers (agents) actions affect both that managers expected return and the correlation of returns between managers. If the managers are risk tolerant, then a noncooperative team organization and a strictly competitive contract, in which each manager is rewarded both for doing well and for doing better than the team, is the most efficient way to discourage herding within the team. This is despite the fact that, in such a contract total wages paid are a concave function of total returns, and so using the contract to discourage herding (and thus achieve lower risk) is in direct conflict with the investors objective of using the contract to transfer risk onto the managers. As the risk aversion of both the investor and the managers increases, cooperation among managers becomes the optimal way to organize the team. For some parameter values, if everyone is risk averse, first-best can be achieved under cooperation. First-best without herding can never be achieved if the managers are risk tolerant, or if cooperation is infeasible

Servicer Contracts and the Design of Mortgage-Backed Security Pools: Servicer Contracts and the Design of Mortgage-Backed Security Pools

We develop a unified model of mortgage and servicer contracts. Renegotiating mortgage contracts following default is strictly Pareto improving, if the lender gathers updated information. An incentive compatible servicer contract requires the servicer to hold a risk position that has a value strictly greater than the cost of exerting effort. This risk position cannot in general be approximated with a horizontal “first‐loss” position. An alternative, forming a nondiversified pool, preserves pool‐wide information, avoids the cost of an incentive compatible servicer contract, and may increase MBS value.

Servicer Contracts and the Design of Mortgage-Backed Security Pools

We develop a unified model of mortgage and servicer contracts. We show that renegotiating mortgage contracts following default is strictly Pareto improving, if the lender gathers updated borrower information. To align servicer incentives with investor interests, we demonstrate that servicers must hold risk positions in MBSs that include “vertical” components. However, offering incentive compatible contracts is not possible if foreclosure is highly inefficient and servicers do not sufficiently value investment in MBSs. In this case, forming a nondiversified pool to preserve pool-wide information may increase MBS value.

Optimal Contracts and Organization of Multiple Money Managers

The optimal organizational form and contracts are characterized for multiple money managers whose actions affect both expected returns and correlation of returns. Inducing diversification of effort to lower risk is in conflict with transfering risk to managers. Encouraging competition is the optimal way to induce risk-tolerant managers to exert effort in diversified activities. As risk aversion increases, enabling cooperation becomes optimal. Counterintuitively, a contract that encourages effort diversification transfers more risk to managers with higher risk aversion. There is a clientele effect: well designed contracts induce more and less risk averse managers to separate in their choices of employment.

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.