We show how target debt ratios in book value terms applied to new investment can improve alignment of investment incentives in firms with risky debt outstanding and asymmetric information. While wealth transfer from both agency conflicts can reduce the value of existing equity, new debt offsets the value loss to old shareholders. When an initial target book debt ratio is preserved following the investment, new debt set by the target debt ratio naturally reflects key factors such as the NPV and size of the new project and offsets wealth transfers. Numerical examples show that both agency conflicts can be eliminated both in structural models and in binomial models.
{"title":"Resolving the Underinvestment and Asymmetric Information Problems with Target Debt Ratios","authors":"Unyong Pyo, Yongjae Shin, H. Thompson","doi":"10.2139/ssrn.1081308","DOIUrl":"https://doi.org/10.2139/ssrn.1081308","url":null,"abstract":"We show how target debt ratios in book value terms applied to new investment can improve alignment of investment incentives in firms with risky debt outstanding and asymmetric information. While wealth transfer from both agency conflicts can reduce the value of existing equity, new debt offsets the value loss to old shareholders. When an initial target book debt ratio is preserved following the investment, new debt set by the target debt ratio naturally reflects key factors such as the NPV and size of the new project and offsets wealth transfers. Numerical examples show that both agency conflicts can be eliminated both in structural models and in binomial models.","PeriodicalId":339527,"journal":{"name":"Second Singapore International Conference on Finance 2008 (Archive)","volume":"101 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122887116","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 model corporate governance in a world with competitive securities markets as well as markets for corporate assets. We show that varying the liquidity and opacity of corporate assets, the vitality of the market for corporate control, and the costs of enforcing shareholder rights to cash flows leads to a plethora of institutional designs. When asset liquidity is high, shareholder rights are enforced through the option to liquidate as in a mutual fund. When the opacity of corporate assets is relatively high and asset liquidity is relatively low, firms will eschew reliance on board monitoring and instead rely on shareholder activism. An increase in the cost of ownership concentration, by increasing the inefficiency of shareholder activism, will increase the reliance on board activism and decrease the reliance on CEO compensation. Decreases in the cost of enforcement of shareholder rights and the opacity of corporate assets, and increased raider activity further strengthen the preference for activist boards.
{"title":"Activists, Raiders, and Directors: Opportunism and the Balance of Corporate Power","authors":"T. Noe, Michael Rebello, Ramana Sonti","doi":"10.2139/ssrn.983748","DOIUrl":"https://doi.org/10.2139/ssrn.983748","url":null,"abstract":"We model corporate governance in a world with competitive securities markets as well as markets for corporate assets. We show that varying the liquidity and opacity of corporate assets, the vitality of the market for corporate control, and the costs of enforcing shareholder rights to cash flows leads to a plethora of institutional designs. When asset liquidity is high, shareholder rights are enforced through the option to liquidate as in a mutual fund. When the opacity of corporate assets is relatively high and asset liquidity is relatively low, firms will eschew reliance on board monitoring and instead rely on shareholder activism. An increase in the cost of ownership concentration, by increasing the inefficiency of shareholder activism, will increase the reliance on board activism and decrease the reliance on CEO compensation. Decreases in the cost of enforcement of shareholder rights and the opacity of corporate assets, and increased raider activity further strengthen the preference for activist boards.","PeriodicalId":339527,"journal":{"name":"Second Singapore International Conference on Finance 2008 (Archive)","volume":"78 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134352935","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}
Financial deepening in rural credit markets remains a long-standing issue in development finance, and the problem of credit rationing has been one of the serious obstacles for economic development. This paper studies the interaction between a borrower, a microfinance institution and a formal bank, and suggests that a linkage between microfinance institutions and formal banks can provide a market-based solution to credit rationing and hence reduce poverty in rural economies. By using the information contained in the MFI's lending decisions, a bank can make more efficient loan decisions. Such linkage has the potential to break the wall between microfinance and formal finance in low-income countries.
{"title":"Making Commercial Microfinance Work for the Poor: The Case of MFIs-Bank Linkage","authors":"S. J. Ho, S. Mallick","doi":"10.2139/ssrn.1077505","DOIUrl":"https://doi.org/10.2139/ssrn.1077505","url":null,"abstract":"Financial deepening in rural credit markets remains a long-standing issue in development finance, and the problem of credit rationing has been one of the serious obstacles for economic development. This paper studies the interaction between a borrower, a microfinance institution and a formal bank, and suggests that a linkage between microfinance institutions and formal banks can provide a market-based solution to credit rationing and hence reduce poverty in rural economies. By using the information contained in the MFI's lending decisions, a bank can make more efficient loan decisions. Such linkage has the potential to break the wall between microfinance and formal finance in low-income countries.","PeriodicalId":339527,"journal":{"name":"Second Singapore International Conference on Finance 2008 (Archive)","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126483860","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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