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 disclosure and security design when auditing firm cash flows is costly. The optimal information structure induces a desired security combination of a convertible debt and/or a performance-sensitive debt. While the former enhances financing probability, the latter reduces auditing costs. We also find that the investor is persuaded to audit less, which not only mitigates the financing hold-up but also raises the entrepreneur’s payoff. Consistent with empirical evidences, the probability of default is shown to decrease in the default costs. And when the default risk goes down due to ex-ante disclosure of inefficient investments, our model predicts that the firm value becomes strictly larger.
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.