Tim S. Campbell

Optimal Investment Financing Decisions and the Value of Confidentiality

In his 1976 Presidential Address to the American Finance Association, Merton Miller provided a compelling argument that there currently exists no viable theory of the optimal capital structure of an individual firm. This argument follows from the critique he presented of existing models of capital structure and from the theory he outlined of the optimal aggregate capital structure of the economy as a whole. That theory depends on the existence of different marginal tax rates for individuals and a tax-free security. Professor Miller pointed out that he was motivated to develop his hypothesis by the apparent inadequacy of a (if not the most) popular explanation for capital structure at both the micro and the aggregate level: the tradeoff between the tax advantages of debt and the cost to the firms security holders of the bankruptcy process. He observed that neither the tax advantage of debt nor the costs of bankruptcy may be quite what they seem at first glance. When the corporate income tax and the differential taxation of regular income and capital gains are taken into account, then the tax advantage of debt is reduced. Moreover, the limited empirical evidence from actual bankruptcies suggests that the real costs to security holders of bankruptcy may be really rather low. And the recent discussion by Haugen and Senbet [6] suggests that most of the costs attributed to bankruptcy are really costs of liquidation of the firms assets and not relevant to the capital structure decision.

An incentive based theory of bank regulation

Abstract In this paper we analyze how depositors can employ both monitoring and capital requirements to control the risk of bank assets. We also analyze how monitors should be compensated if their actions are not directly observable and if there are binding limits on their liability. Second-best capital and monitoring levels (with unobservable actions) will be distorted away from their respective first-best levels. We derive some results about the nature of these distortions and characterize the optimal incentive scheme for monitors.

Myopic Investment Decisions and Competitive Labor Markets

This paper analyzes an agency problem where managers are able to control an unobservable variable that affects the time distribution of returns on a firms investments. Managers have an incentive to select myopic investments in order to convince the labor market that they have relatively high ability. The authors demonstrate that, if employment terms are determined in competitive labor markets and there are lower bounds on compensations, then, at the principals second-best contract, managers make a myopic investment choice. They also characterize the structure of the principals second-best contract and conduct comparative statics at this solution. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Incentive contracts for managers who discover and manage investment projects

We analyse how principals can select incentive contracts to induce managers to make optimal investment decisions when the managers privately observe information which is informative both about their own ability and about the value of projects. We show that there exist contracts based solely on actual returns which can implement the first-best investment decision and which entail no excess compensation to the managers. However, these contracts are unstable in competitive spot labor markets because of adverse selection. We demonstrate that the adverse selection problem can be remedied with a contract which involves precommitment of performance level by managers.

Financial risk management : fixed income and foreign exchange

Financial risk management : fixed income and foreign exchange , Financial risk management : fixed income and foreign exchange , کتابخانه دیجیتال و فن آوری اطلاعات دانشگاه امام صادق(ع)

The Market for Managerial Labor Services and Capital Market Equilibrium

This paper presents a model of equilibrium in a capital market for linear shares of risky firms andin a market for managerial labor in which market participants function as both investors and managers. The model yields interesting and relevant equilibrium conditions that integrate earlier separate treatments of the capital market with human capital and the incentive contracting problem regarding shirking.The theory developed here provides a microeconomic explanation of how the price of risk established in the capital market is relevant to the labor contracting problem. The analysis also provides a logical rationale for the division of responsibilities between a board of directors and the management of the firm.

Intermediation and the market for interest rate swaps

Abstract This paper analyzes the role of financial intermediaries as marketmakers in the market for interest rate swaps. We argue that intermediaries which hold large nontraded portfolios of swaps are efficient alternatives to direct hedging by counterparties in publicly traded cash and futures instruments. The efficiency afforded by the swap marketmaker derives from reduction in transactions costs, diversification of basis risk, and reduced agency costs of debt. The analysis provides an explanation for the existence and success of the swaps market as a means for spreading risk and for its dominance by large financial institutions.

Abstract: Optimal Investment Financing Decisions and the Value of Confidentiality

This paper presents a new explanation for the use of debt financing, particularly private debt, in addition to equity without relying on the existence of taxes or bankruptcy costs. The paper assumes that information about returns on investment projects is costly and subject to efficient specialization, so that managers of firms develop inside information not possessed by the market. Suppose the manager of a firm possesses such inside information about a new investment project and his objective is to act in the best interests of existing equity owners. If the information can be disclosed to the market without impairing the value of the project, he will do so. However, much information will be of a strategic nature where the value of the project depends upon confidentiality. Public financing of such projects without disclosing the information will mean that the excess value or surprise monopoly profits in the new project will be split between new and old owners.

Incentives for Information Production and Optimal Job Assignment with Human Capital Considerations

In this paper, the authors examine the problem of inducing a manager to acquire information that is useful in determining his optimal job assignment but which might also adversel y affect his market value. The authors show that spot contracts are optimal and generate the first-best effort level when the manager is risk-neutral. When the manager is risk-averse, the optimal contract consists either of a partial insurance contract against downward revisions in compensation or a competitive spot contract, depending upon the nature of prior information. Copyright 1993 by The London School of Economics and Political Science.

On the optimal regulation of financial guarantees

This paper examines the economic basis for the regulation of financial guarantees or commitments by a third party to provide payments in the event of default. It is argued that regulators can serve as monitors who minimize information or agency costs. However, in the U.S. markets private rating agencies provide such a monitoring function so that regulation is warranted only in the event that there are problems with these private monitors. In addition, since guarantees are directly linked to securitization, regulatory actions that encourage securitization tend to encourage the growth of financial guarantees.