Dynamic Financial Contracting with Persistent Private Information with R. Vijay Krishna (web Appendix)
RAND Journal of Economics, 2019, Vol.50 No. 2, pp. 418-452.
Voluntary Disclosure, Moral Hazard, and Default Risk with Giulio Trigilia
Management Science, 2023, published online.
Persuasion in Optimal Financing with Shuguang Zhu (Under Review)
We examine the interplay between information and security design when auditing early-stage firm performance is costly. The model features staged business experiments that generate milestone-based funding and endogenously lead to participating preferred equity or venture debt with warrants. Strategic experimentation reduces auditing, mitigates financing hold-ups, and increases entrepreneurial value. The model predicts that inexperienced founders are more likely to secure funding through attainable milestones and participating preferred equity, even though such contracts lower venture success rates. It also predicts that default probability declines with auditing costs, while firm value is non-monotonic, as experimentation screens out inefficient investments.
Dynamic Capital Allocation, Incentive, and Monitoring (Revising)
This paper studies dynamic capital budgeting when project information is privately known by the division manager who benefits from inefficiently deploying capital. Performance history endogenously determines the budget size which affects the incentive versus monitoring trade-off in different projects. When the budget is small, cash incentive is costly, investment is severely rigid, and monitoring focuses on large projects. When the budget becomes larger, investment is less rigid and monitoring shifts toward smaller projects. When the budget is sufficiently large, steep incentives are provided to induce efficient investments and no project is monitored. The model better explains the evidences that firm stored liquidity is positively correlated with incentive pay, and negatively with investment hurdle rates. It also predicts new and endogenous monitoring strategies in capital budgeting.