It is difficult to motivate advisors to acquire information through standard performance-contracts when outcomes are uncertain and/or only observed in the distant future. Decision-makers may however exploit advisors’ desire to influence the outcome. We build a model in which a decision-maker and two advisors care about the decision’s consequences, which depend on an unknown parameter. To reduce uncertainty, the advisors can produce information of low or high accuracy; this information becomes public but the decision-maker cannot assess its accuracy with certainty, and monetary transfers are unavailable. Moreover, the information the two advisors produce may be conflicting. We show the optimal decision-rule involves making the final decision exceedingly sensitive to the jointly provided information.
{"title":"Motivating Agents to Acquire Information","authors":"Charles Angelucci","doi":"10.2139/ssrn.2905367","DOIUrl":"https://doi.org/10.2139/ssrn.2905367","url":null,"abstract":"It is difficult to motivate advisors to acquire information through standard performance-contracts when outcomes are uncertain and/or only observed in the distant future. Decision-makers may however exploit advisors’ desire to influence the outcome. We build a model in which a decision-maker and two advisors care about the decision’s consequences, which depend on an unknown parameter. To reduce uncertainty, the advisors can produce information of low or high accuracy; this information becomes public but the decision-maker cannot assess its accuracy with certainty, and monetary transfers are unavailable. Moreover, the information the two advisors produce may be conflicting. We show the optimal decision-rule involves making the final decision exceedingly sensitive to the jointly provided information.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127621810","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Following the economic recession of 2009-11, the U.S. Congress approved legislation weakening the information disclosure requirements for small companies seeking financing in public and private markets. This policy has been criticized by analysts who warn against a reduction in investors’ willingness to invest, and hence in the amount of capital firms can raise. We argue that a risk sharing motive for trading implies that the new legislation is indeed consistent with its intended goal, and in fact, that a full disclosure requirement minimizes the capital that a firm can raise, given its business scale. Disclosure requirements that become more stringent at a larger business scale, such as those in the new legislation, may improve economic efficiency in the Pareto sense, increasing both financing of small and large firms and investors’ welfare. When liability is unlimited, disclosure that requires more detailed announcements of events with negative impact on return is ex ante favorable for the firm.
{"title":"Jobs and SOX: Information Design and Capital Formation","authors":"A. Carvajal, M. Rostek, G. Sublet","doi":"10.2139/ssrn.3106129","DOIUrl":"https://doi.org/10.2139/ssrn.3106129","url":null,"abstract":"Following the economic recession of 2009-11, the U.S. Congress approved legislation weakening the information disclosure requirements for small companies seeking financing in public and private markets. This policy has been criticized by analysts who warn against a reduction in investors’ willingness to invest, and hence in the amount of capital firms can raise. We argue that a risk sharing motive for trading implies that the new legislation is indeed consistent with its intended goal, and in fact, that a full disclosure requirement minimizes the capital that a firm can raise, given its business scale. Disclosure requirements that become more stringent at a larger business scale, such as those in the new legislation, may improve economic efficiency in the Pareto sense, increasing both financing of small and large firms and investors’ welfare. When liability is unlimited, disclosure that requires more detailed announcements of events with negative impact on return is ex ante favorable for the firm.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-10-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132966652","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper analyzes a setting in which a manufacturer and a retailer face uncertain demand, but the retailer has an information advantage in the form of a private demand forecast. We first analyze the case when the demand forecast is common knowledge, which yields the manufacturer's first-best equilibrium profits. Next, we analyze the case where the forecast is privately observed by the retailer and establish that the manufacturer incurs a hidden information cost as his equilibrium profits drop below the first-best case. Finally, we analyze the case where the manufacturer uses a temporary price discount to incentivize the retailer to purchase some quantity before she observes the forecast signal; after observing the signal, she can order more at the full (un-discounted) price. We show that by offering the retailer a temporary price discount, the manufacturer can achieve first-best profits without actually observing the demand forecast. In other words, by offering the retailer a temporary price discount, the manufacturer can achieve the same expected profits as if he observes the retailer's private information, without this information being directly revealed.
{"title":"Temporary Contract Adjustment to a Retailer with a Private Demand Forecast","authors":"S. Nasser, Danko Turcic","doi":"10.2139/ssrn.2720442","DOIUrl":"https://doi.org/10.2139/ssrn.2720442","url":null,"abstract":"This paper analyzes a setting in which a manufacturer and a retailer face uncertain demand, but the retailer has an information advantage in the form of a private demand forecast. We first analyze the case when the demand forecast is common knowledge, which yields the manufacturer's first-best equilibrium profits. Next, we analyze the case where the forecast is privately observed by the retailer and establish that the manufacturer incurs a hidden information cost as his equilibrium profits drop below the first-best case. Finally, we analyze the case where the manufacturer uses a temporary price discount to incentivize the retailer to purchase some quantity before she observes the forecast signal; after observing the signal, she can order more at the full (un-discounted) price. We show that by offering the retailer a temporary price discount, the manufacturer can achieve first-best profits without actually observing the demand forecast. In other words, by offering the retailer a temporary price discount, the manufacturer can achieve the same expected profits as if he observes the retailer's private information, without this information being directly revealed.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"50 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-08-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125902296","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2017-08-22DOI: 10.16980/JITC.13.4.201708.197
Sung-Haw Kim
This paper examines the effects of foreign indirect investment (FII), particularly focusing on exporting activities, on the stock market performances of Chinese firms, using data of 1,341 firms that went public on the Shanghai and Shenzhen Stock Exchanges from 2003 to 2015. We find that the initial returns are lower, when compared by the five-year cumulative abnormal returns (CARs) for firms with foreign investments, than those with Chinese investments prior to IPOs, that returns are lower for the initial and one-year CARs, while the returns for longer-run CARs are higher for firms with pre-IPO exports, and that firms with post-IPO foreign investments show much lower returns for three-year and five-year CARs than those invested by Chinese investors only, that the joint effect of pre-IPO and post-IPO foreign investments and export activities are negative for one- and three-year CARs and that, while exports and foreign indirect investments show significantly lower initial returns, their long-term joint effects are more negative, possibly due to the negative effect of exports in the short-run. The results support the asymmetric information theory, positively for firms with foreign investors in the market before listing and negatively for those with Chinese investors only, particularly for the firms with exports.
{"title":"Do Foreign Investors Outperform Chinese Counterparts in Their Indirect Investments in Chinese IPO Firms?: With a Focus on Exporting Activities","authors":"Sung-Haw Kim","doi":"10.16980/JITC.13.4.201708.197","DOIUrl":"https://doi.org/10.16980/JITC.13.4.201708.197","url":null,"abstract":"This paper examines the effects of foreign indirect investment (FII), particularly focusing on exporting activities, on the stock market performances of Chinese firms, using data of 1,341 firms that went public on the Shanghai and Shenzhen Stock Exchanges from 2003 to 2015. We find that the initial returns are lower, when compared by the five-year cumulative abnormal returns (CARs) for firms with foreign investments, than those with Chinese investments prior to IPOs, that returns are lower for the initial and one-year CARs, while the returns for longer-run CARs are higher for firms with pre-IPO exports, and that firms with post-IPO foreign investments show much lower returns for three-year and five-year CARs than those invested by Chinese investors only, that the joint effect of pre-IPO and post-IPO foreign investments and export activities are negative for one- and three-year CARs and that, while exports and foreign indirect investments show significantly lower initial returns, their long-term joint effects are more negative, possibly due to the negative effect of exports in the short-run. The results support the asymmetric information theory, positively for firms with foreign investors in the market before listing and negatively for those with Chinese investors only, particularly for the firms with exports.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-08-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114821836","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A principal hires an agent to acquire costly information that will influence the decision of a third party. While the realized piece of information is observable and contractible, the experimental process is not. Assuming a general family of information cost functions (inclusive of Shannon’s mutual information), we show that the first best is achievable when the agent has limited liability or when he is risk averse, in contrast to standard moral hazard models. However, when the agent is risk averse and has limited liability, efficiency losses arise generically. Specifically, we show that the principal obtains his first best outcome if and only if she intends to implement a ”symmetric” experiment, i.e. one in which the cost of generating each piece of evidence is the same. On the other hand, ”asymmetric” experiments that are relatively uninformative with high probability but occasionally produce conclusive evidence will bear large agency costs.
{"title":"Incentivizing Information Design","authors":"Daniel A. Rappoport, Valentin Somma","doi":"10.2139/ssrn.3001416","DOIUrl":"https://doi.org/10.2139/ssrn.3001416","url":null,"abstract":"A principal hires an agent to acquire costly information that will influence the decision of a third party. While the realized piece of information is observable and contractible, the experimental process is not. Assuming a general family of information cost functions (inclusive of Shannon’s mutual information), we show that the first best is achievable when the agent has limited liability or when he is risk averse, in contrast to standard moral hazard models. However, when the agent is risk averse and has limited liability, efficiency losses arise generically. Specifically, we show that the principal obtains his first best outcome if and only if she intends to implement a ”symmetric” experiment, i.e. one in which the cost of generating each piece of evidence is the same. On the other hand, ”asymmetric” experiments that are relatively uninformative with high probability but occasionally produce conclusive evidence will bear large agency costs.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"77 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-08-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133018545","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate a market in which experts have a moral hazard problem because they need to invest in costly but unobservable effort to identify consumer problems. Experts have either high or low qualification and can invest either high or low effort in their diagnosis. High skilled experts are able to identify problems with some probability even with low effort while low skilled experts here always give false recommendations. Experts compete for consumers by setting prices for diagnosis and service. Consumers can visit multiple experts, which enables an endogenous verifiability of diagnosis. We show that with a sufficient number of high skilled experts, stable second-best and perfectly non-degenerate equilibria are possible even with flexible prices, although they depend on transactions costs being relatively low. By contrast, with a small share of high skilled experts in the market, setting fixed prices can be beneficial for society.
{"title":"Effects of Qualification in Expert Markets with Price Competition and Endogenous Verifiability","authors":"Tim Schneider, K. Bizer","doi":"10.2139/ssrn.3009184","DOIUrl":"https://doi.org/10.2139/ssrn.3009184","url":null,"abstract":"We investigate a market in which experts have a moral hazard problem because they need to invest in costly but unobservable effort to identify consumer problems. Experts have either high or low qualification and can invest either high or low effort in their diagnosis. High skilled experts are able to identify problems with some probability even with low effort while low skilled experts here always give false recommendations. Experts compete for consumers by setting prices for diagnosis and service. Consumers can visit multiple experts, which enables an endogenous verifiability of diagnosis. We show that with a sufficient number of high skilled experts, stable second-best and perfectly non-degenerate equilibria are possible even with flexible prices, although they depend on transactions costs being relatively low. By contrast, with a small share of high skilled experts in the market, setting fixed prices can be beneficial for society.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"64 9","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-07-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120844113","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines whether third-party-generated nonfinancial information on Twitter, once aggregated at the firm level, is predictive of upcoming firm-level fundamentals, and if so, what factors determine the cross-sectional variation in the predictive power. First, this study finds that the predictive power of nonfinancial information on Twitter is greater for firms whose major customers are consumers than for firms whose major customers are businesses. Second, the predictive power of the volume and valence of Twitter comments about products and brands with respect to firm-level fundamentals varies with the level of advertising. However, professionals in the capital markets, such as analysts, do not fully incorporate the implications for upcoming sales of the collective wisdom on Twitter. Analysts do not revise their forecasts of sales in response to the change in Twitter information, and thus, the consensus forecast error is systematically biased conditional on nonfinancial information disseminated on Twitter.
{"title":"Wisdom of Crowds: Cross-sectional Variation in the Informativeness of Third-Party-Generated Product Information on Twitter","authors":"Vicki Wei Tang","doi":"10.2139/ssrn.2775389","DOIUrl":"https://doi.org/10.2139/ssrn.2775389","url":null,"abstract":"This paper examines whether third-party-generated nonfinancial information on Twitter, once aggregated at the firm level, is predictive of upcoming firm-level fundamentals, and if so, what factors determine the cross-sectional variation in the predictive power. First, this study finds that the predictive power of nonfinancial information on Twitter is greater for firms whose major customers are consumers than for firms whose major customers are businesses. Second, the predictive power of the volume and valence of Twitter comments about products and brands with respect to firm-level fundamentals varies with the level of advertising. However, professionals in the capital markets, such as analysts, do not fully incorporate the implications for upcoming sales of the collective wisdom on Twitter. Analysts do not revise their forecasts of sales in response to the change in Twitter information, and thus, the consensus forecast error is systematically biased conditional on nonfinancial information disseminated on Twitter.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"228 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-07-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122618970","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We show how the prospect of disputes over firms' revenue reports promotes debt financing over equity. This is demonstrated in a costly state verification model with a risk‐averse entrepreneur. The prospect of disputes encourages incentive contracts that limit penalties and avoid stochastic monitoring, even when the lender can commit to stochastic monitoring. Consequently, optimal contracts shift from equity toward standard debt. In short, when audit signals are weakly correlated with true incomes, standard debt contracts emerge as optimal; if audit signals are highly correlated with true incomes, optimal contracts resemble equity. When audit costs are sufficiently high, stochastic monitoring may be optimal. Optimal standard debt contracts under imperfect audits are shown to reproduce key empirical facts of U.S. firm borrowing.
{"title":"Disputes, Debt and Equity","authors":"A. Duncan, Charles Nolan","doi":"10.2139/ssrn.3069639","DOIUrl":"https://doi.org/10.2139/ssrn.3069639","url":null,"abstract":"We show how the prospect of disputes over firms' revenue reports promotes debt financing over equity. This is demonstrated in a costly state verification model with a risk‐averse entrepreneur. The prospect of disputes encourages incentive contracts that limit penalties and avoid stochastic monitoring, even when the lender can commit to stochastic monitoring. Consequently, optimal contracts shift from equity toward standard debt. In short, when audit signals are weakly correlated with true incomes, standard debt contracts emerge as optimal; if audit signals are highly correlated with true incomes, optimal contracts resemble equity. When audit costs are sufficiently high, stochastic monitoring may be optimal. Optimal standard debt contracts under imperfect audits are shown to reproduce key empirical facts of U.S. firm borrowing.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122859614","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using data from Lending Club and Prosper, the two largest peer-to-peer lenders in the U.S., we provide evidence of adverse selection in the online personal lending market. Borrowers who were rejected by a competitor are 2.5 times more likely to default than borrowers who were not rejected by a competitor, conditional on receiving the same contract. We also show that modeled competitors' interest rate offers are significantly related to default; these offers provide explanatory power that is not captured by the actual interest rates on the loans.
{"title":"Competition and Adverse Selection in an Online Lending Market","authors":"Don Carmichael","doi":"10.2139/ssrn.2985908","DOIUrl":"https://doi.org/10.2139/ssrn.2985908","url":null,"abstract":"Using data from Lending Club and Prosper, the two largest peer-to-peer lenders in the U.S., we provide evidence of adverse selection in the online personal lending market. Borrowers who were rejected by a competitor are 2.5 times more likely to default than borrowers who were not rejected by a competitor, conditional on receiving the same contract. We also show that modeled competitors' interest rate offers are significantly related to default; these offers provide explanatory power that is not captured by the actual interest rates on the loans.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"56 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-06-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133246480","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a field-specific dictionary to measure the stance of the European Central Bank (ECB) monetary policy (dovish, neutral, hawkish) and the state of the Eurozone economy (positive, neutral, negative) through the content of ECB press conferences. In contrast with traditional textual analysis, we propose a novel approach using term-weighting and contiguous sequence of words (n-grams) to better capture the subtlety of central bank communication. We find that quantifying ECB communication using our field-specific weighted lexicon helps to explain future ECB monetary decisions when considering an augmented Taylor rule. Regarding European stock market volatility, we find that markets are more (less) volatile on the day following a conference with a negative (positive) tone about the euro area economic outlook. Our indicators significantly outperform a textual classification based on the Loughran–McDonald or Apel–Blix Grimaldi dictionaries and a media-based measure of economic policy uncertainty.
{"title":"Words are Not All Created Equal: A New Measure of ECB Communication","authors":"Matthieu Picault, Thomas Renault","doi":"10.2139/ssrn.2980777","DOIUrl":"https://doi.org/10.2139/ssrn.2980777","url":null,"abstract":"We develop a field-specific dictionary to measure the stance of the European Central Bank (ECB) monetary policy (dovish, neutral, hawkish) and the state of the Eurozone economy (positive, neutral, negative) through the content of ECB press conferences. In contrast with traditional textual analysis, we propose a novel approach using term-weighting and contiguous sequence of words (n-grams) to better capture the subtlety of central bank communication. We find that quantifying ECB communication using our field-specific weighted lexicon helps to explain future ECB monetary decisions when considering an augmented Taylor rule. Regarding European stock market volatility, we find that markets are more (less) volatile on the day following a conference with a negative (positive) tone about the euro area economic outlook. Our indicators significantly outperform a textual classification based on the Loughran–McDonald or Apel–Blix Grimaldi dictionaries and a media-based measure of economic policy uncertainty.","PeriodicalId":232169,"journal":{"name":"ERN: Other Microeconomics: Asymmetric & Private Information (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-06-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114838624","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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