Qin Lian

Insurance Contract Design When the Insurer Has Private Information on Loss Size

This article examines the optimal indemnity contract in an insurance market, when the insurer has private information about the size of an insurable loss. Both parties know whether or not a loss occurred, but only the insurer knows the true value of the loss and/or to what extent the losses are covered under the policy. The insured may verify the insurers loss estimate for a fixed auditing cost. The optimal contract reimburses the auditing costs in addition to full insurance for losses less than some endogenous limit. For losses exceeding this limit, the contract pays a fixed indemnity and requires no monitoring. The optimal contract is compared with the contracts obtained in cases where it is only the insured who can observe the loss size.

Pulsation in a competitive model of advertising-firm's cost interaction

The literature reveals contradiction between theoretical results (superiority of uniform policy under a concave advertising response function) and empirical results (concavity of the advertising response function and the superiority of a pulsation policy). To reconcile the above difference, this paper offers a resolution based on (1) the concavity of the advertising response function; (2) the convexity of the firms cost function; and (3) over-advertising. The resolution is reached upon maximizing the net profit per unit time over the infinite planning horizon subject to an exogenous advertising budget constraint. Theoretical results for monopolistic markets are found mostly generalized to competitive markets. A numerical example is introduced to gain more insight into the theoretical findings and an approach is introduced and implemented to empirically assess the shape of a firms cost function and the advertising policy to be employed.

The Impact of Common Advisors on Mergers and Acquisitions

We examine the conflict of interest that an investment bank faces when advising both the target and acquirer in a merger or acquisition (M&A) by investigating how common advisors affect deal outcomes. We compare M&As with common advisors to deals in which targets and acquirers use different advisors and account for the endogenous nature of this choice. We find that (1) deals with common advisors are less likely to be completed and take longer to resolve, and (2) sharing advisors does not affect the wealth gains of shareholders of targets, acquirers or the combined firm and the post-acquisition performance of acquirers. We find some evidence that valuation multiples paid for targets and deal premiums for public targets are significantly lower in transactions with common advisors, suggesting that common advisors tend to favor acquirers over targets, with an eye on future investment banking business from the larger, surviving firm. But most of our results suggest that common M&A advisors lead to neither better deal outcomes by facilitating information flow between targets and acquirers, nor worse deal outcomes by influencing both sides to hasten deal completion.

Does Hiring M&A Advisers Matter for Private Sellers?

We examine the determinants of private sellers’ choice of hiring M&A advisers or top-tier advisers and the effects of these choices on deal valuations. Using a novel, hand-collected dataset on the hiring of advisers in a large sample of M&A deals, we find that private sellers appear to make these choices in economically sensible ways. After accounting for this selection effect, we find that private sellers receive significantly higher acquisition premiums when they retain advisers. Among private sellers that hire advisers, hiring top-tier advisers leads to higher acquisition premiums to sellers. We find some evidence that acquirers’ announcement returns are lower in deals where private sellers use advisers. Our findings suggest that the hiring and reputation of M&A advisers improve private sellers’ bargaining power and deal valuations.

Does Modern Portfolio Theory Need an Update? Analyzing Single-Country ETFs During Extreme Market Movements

This article investigates whether country characteristics can determine diversification benefits provided by single-country exchange traded funds (ETFs) to U.S.-based investors during crises and non-crises periods. We find several country-specific characteristics, including prior correlation, foreign direct investment, GDP growth rate, inflation rate, and inclusion in the G7 are significant in explaining diversification benefits during non-crises periods. We find that most of the coefficients lose significance during the crises periods in both raw and contagion corrected models, proving the choice of which international funds to invest is difficult for investors in today’s global financial marketplace. This study finds that investors seeking protection from extreme U.S. market returns are not able to identify which single-country ETFs will serve to diversify their portfolios during extreme market movements using easily accessible finance and economic variables. The results of this study further complicate the decisions investor face in creating a well-diversified portfolio and serve as a warning to individual investors and managers attempting to determine which country single-country ETFs will provide diversification benefits using traditional estimation tools.