Shantanu Banerjee

Optimal Exercise of Jointly Held Real Options: A Nash Bargaining Approach with Value Diversion

This paper provides a two-stage decision framework in which two or more parties exercise a jointly held real option. We show that a single party’s timing decision is always socially efficient if it precedes bargaining on the terms of sharing. However, if the sharing rule is agreed before the exercise timing decision is made, then socially optimal timing is attained only if there is a cash payment element in the division of surplus. If the party that chooses the exercise timing can divert value from the project, then the first-best outcome may not be possible at all and the second-best outcome may be implemented using a contract that is generally not optimal in the former cases. Our framework contributes to the understanding of a range of empirical regularities in corporate and entrepreneurial finance.

IPO Waves and Hot Markets in the UK

This paper examines the cyclical nature of IPO activity in the UK. The results indicate a lead-lag relationship between IPO initial returns and volume. IPO volume is sensitive to recent changes in market conditions. There is evidence of industry concentration in hot markets, and fi rms raise more equity during these periods. Overall, IPO waves in the UK share similar characteristics with those in the US. The findings are consistent with rational explanations of IPO waves. However, explanations based on investor sentiment and market timing cannot be ruled out, since there is a strong positive relationship between IPO volume and the markets price-to-book ratio.

Joint Venture Instability Under Entry

Many developing countries are liberalizing their economies to allow higher equity participation by the foreign firms. We argue that the possibility of joint venture can reduce the number of technology transfers. Hence, joint venture can reduce the welfare of a host-country by creating higher market-concentration. However, higher profit generation under joint venture encourages the foreign firm to transfer relatively better technology and may make the host-country and the firms better-off under joint venture than licensing. For sufficiently large efficiency-gain, the host-country allows fully owned subsidiary of the foreign firm.

In the Path of the Storm: Does Financial Distress Cause Non-Financial Firms to Risk-Shift?

We use a new proxy capturing manager-initiated changes to firm risk together with a unique identification strategy to study whether financial distress causes non-financial firms to risk-shift. We derive the proxy from an application of modern portfolio theory to operating-segment data and use hurricanes as distress risk instrument. Distress risk shocks lead moderately distressed firms to risk-shift. Risk-shifting is facilitated by closing low-risk segments and raises failure rates. Further evidence suggests that creditor control keeps highly distressed firms from risk-shifting. Despite its importance, we are first to empirically show that agency problems of debt cause non-financial firms to risk-shift.

Protecting Consumers Through Patent Protection: The Implications of Merger

We challenge the common wisdom that patent protection (compared to no or weak patent protection) makes the consumers worse off by reducing product-market competition unless it increases innovation significantly. We show that the absence of patent protection may encourage horizontal merger and affect the consumers adversely by increasing product-market concentration compared to the situation with patent protection. Hence, even if we ignore the innovation inducing role of patent protection, the positive impact of patent protection on the consumers through its effect on the product-market competition provides a new rationale for patent protection, which has been overlooked in the literature.

Knowledge spillover and information sharing : the case of uncertain R&D

We show the effects of “knowledge spillover at the R&D stage” and “no knowledge spillover at the R&D stage but information sharing after R&D” on the equilibrium R&D investments. For large knowledge spillover, the equilibrium R&D investments are higher under no knowledge spillover but information sharing compared to knowledge spillover at the R&D stage. However, these two regimes can generate the same outcome for small knowledge spillover.