We study an assignment market where multiple heterogenous objects are sold to unit demand agents who have general preferences accommodating imperfect transferability of utility and income effects. In such a model, there is a minimum price equilibrium. We establish the structural characterizations of minimum price equilibria and employ these results to design the "Serial Vickrey mechanism," that finds a minimum price equilibrium in a finite number of steps. The Serial Vickrey mechanism introduces the objects one by one, and requires agents to report finite-dimensional prices in finitely many times. Besides, the Serial Vickrey mechanism also has nice dynamic incentive properties.
{"title":"Serial Vickrey Mechanism","authors":"Yu Zhou, Shigehiro Serizawa","doi":"10.2139/ssrn.3667371","DOIUrl":"https://doi.org/10.2139/ssrn.3667371","url":null,"abstract":"We study an assignment market where multiple heterogenous objects are sold to unit demand agents who have general preferences accommodating imperfect transferability of utility and income effects. In such a model, there is a minimum price equilibrium. We establish the structural characterizations of minimum price equilibria and employ these results to design the \"Serial Vickrey mechanism,\" that finds a minimum price equilibrium in a finite number of steps. The Serial Vickrey mechanism introduces the objects one by one, and requires agents to report finite-dimensional prices in finitely many times. Besides, the Serial Vickrey mechanism also has nice dynamic incentive properties.","PeriodicalId":440574,"journal":{"name":"ERN: Asymmetric & Private Information (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-07-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116268860","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 whether providers of news analytics affect the stock market. We exploit a unique identification strategy based on revisions between different product releases of a major provider of news analytics. We document a causal effect of news analytics on the market, irrespective of the informational content of the news. Coverage in news analytics speeds up the market reaction in terms of stock price response and trading volume, but temporarily increases illiquidity and can result in temporary price distortions that might increase volatility and reduce market stability. Furthermore, we document that traders learn dynamically about the precision of news analytics.
{"title":"First to 'Read' the News: News Analytics and High Frequency Trading","authors":"Bastian von Beschwitz, Donald B. Keim, M. Massa","doi":"10.2139/ssrn.2356547","DOIUrl":"https://doi.org/10.2139/ssrn.2356547","url":null,"abstract":"We investigate whether providers of news analytics affect the stock market. We exploit a unique identification strategy based on revisions between different product releases of a major provider of news analytics. We document a causal effect of news analytics on the market, irrespective of the informational content of the news. Coverage in news analytics speeds up the market reaction in terms of stock price response and trading volume, but temporarily increases illiquidity and can result in temporary price distortions that might increase volatility and reduce market stability. Furthermore, we document that traders learn dynamically about the precision of news analytics.","PeriodicalId":440574,"journal":{"name":"ERN: Asymmetric & Private Information (Topic)","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-10-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115749198","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}
In this dissertation, I analyze behavior of two types of financial intermediaries that play critical roles in capital allocation: ratings agencies and merger advisors. Each type of intermediary survives due to (assumed) informational advantages relative to firms and investors. In the following chapters, I analyze how differences in information between market participants and intermediaries lead to signaling behavior related to privately-observed quality. My results explain some seemingly-anomalous aspects of financial markets, and provide a framework for assessing the impact intermediaries can have on efficient capital allocation.
{"title":"Essays on Financial Intermediation - Dissertation Executive Summary","authors":"Javed Ahmed","doi":"10.2139/ssrn.2037981","DOIUrl":"https://doi.org/10.2139/ssrn.2037981","url":null,"abstract":"In this dissertation, I analyze behavior of two types of financial intermediaries that play critical roles in capital allocation: ratings agencies and merger advisors. Each type of intermediary survives due to (assumed) informational advantages relative to firms and investors. In the following chapters, I analyze how differences in information between market participants and intermediaries lead to signaling behavior related to privately-observed quality. My results explain some seemingly-anomalous aspects of financial markets, and provide a framework for assessing the impact intermediaries can have on efficient capital allocation.","PeriodicalId":440574,"journal":{"name":"ERN: Asymmetric & Private Information (Topic)","volume":"26 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130909111","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}
Randy Priem, N. Huyghebaert, Linda M. Van De Gucht
We empirically examine under what conditions lead financiers decide to finance a buyout through a syndicate of multiple investors and how these syndicates are structured, using a unique dataset of 865 European buyouts during 1999-2009. We rely on a theoretical framework that integrates the benefits of syndication, based on risk-diversification, resource-based, and deal-flow motives, and the costs of syndication, such as potential information and incentive problems within the syndicate. We find evidence that lead financiers syndicate to diversify target default and legal risk, and to learn about the institutions of the target country. Lead financiers subsequently decide on the fraction of the deal to retain and on the number of syndicate participants so as to minimize syndication costs while further maximizing syndication benefits. Interestingly, and after accounting for the endogeneity of syndication decisions, we find that the post-buyout profitability and growth of target firms are superior when buyouts are syndicated and when these syndicates are structured to maximize investor involvement while limiting conflicts of interest.
{"title":"Incidence and Structure of European Buyout Syndicates: Empirical Results from an Integrated Study","authors":"Randy Priem, N. Huyghebaert, Linda M. Van De Gucht","doi":"10.2139/ssrn.2021728","DOIUrl":"https://doi.org/10.2139/ssrn.2021728","url":null,"abstract":"We empirically examine under what conditions lead financiers decide to finance a buyout through a syndicate of multiple investors and how these syndicates are structured, using a unique dataset of 865 European buyouts during 1999-2009. We rely on a theoretical framework that integrates the benefits of syndication, based on risk-diversification, resource-based, and deal-flow motives, and the costs of syndication, such as potential information and incentive problems within the syndicate. We find evidence that lead financiers syndicate to diversify target default and legal risk, and to learn about the institutions of the target country. Lead financiers subsequently decide on the fraction of the deal to retain and on the number of syndicate participants so as to minimize syndication costs while further maximizing syndication benefits. Interestingly, and after accounting for the endogeneity of syndication decisions, we find that the post-buyout profitability and growth of target firms are superior when buyouts are syndicated and when these syndicates are structured to maximize investor involvement while limiting conflicts of interest.","PeriodicalId":440574,"journal":{"name":"ERN: Asymmetric & Private Information (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-03-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128658300","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 framework in which: (i) a firm can have a new product tested publicly before launch; and (ii) tests vary in toughness, holding expertise fixed. Price flexibility boosts the positive impact on consumer beliefs of passing a tough test and mitigates the negative impact of failing a soft test. As a result, profits are convex in toughness: the firm selects either the toughest or softest test available. The toughest test is optimal when consumers start with an unfavorable prior and receive sufficiently uninformative private signals (an “innovative” product); the softest test is optimal when signals are sufficiently informative.
{"title":"The Optimal Choice of Pre-Launch Reviewer","authors":"D. Gill, D. Sgroi","doi":"10.2139/ssrn.1422641","DOIUrl":"https://doi.org/10.2139/ssrn.1422641","url":null,"abstract":"We develop a framework in which: (i) a firm can have a new product tested publicly before launch; and (ii) tests vary in toughness, holding expertise fixed. Price flexibility boosts the positive impact on consumer beliefs of passing a tough test and mitigates the negative impact of failing a soft test. As a result, profits are convex in toughness: the firm selects either the toughest or softest test available. The toughest test is optimal when consumers start with an unfavorable prior and receive sufficiently uninformative private signals (an “innovative” product); the softest test is optimal when signals are sufficiently informative.","PeriodicalId":440574,"journal":{"name":"ERN: Asymmetric & Private Information (Topic)","volume":"143 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-12-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116001216","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 article analyzes the motivation for loan securitization and its effect on loan market efficiency. We consider a two-period loan market competition model in which period 2-competition is affected by the winner's curse. This increases ex ante competition for a greater initial market share. Given that securitization transfers a part of the return from loans to other investors, banks can use it as a tool to signal that they will reduce monitoring, for the purpose of softening ex ante competition. Thus, securitization adversely affects loan market efficiency while it leads banks to increases collectively their profits. This effect is driven by primary loan market competition, not by the exploitation of informational asymmetries in the secondary market for loans.
{"title":"Securitization, Competition and Efficiency","authors":"Jung-Hyun Ahn, Régis Breton","doi":"10.2139/ssrn.1361792","DOIUrl":"https://doi.org/10.2139/ssrn.1361792","url":null,"abstract":"This article analyzes the motivation for loan securitization and its effect on loan market efficiency. We consider a two-period loan market competition model in which period 2-competition is affected by the winner's curse. This increases ex ante competition for a greater initial market share. Given that securitization transfers a part of the return from loans to other investors, banks can use it as a tool to signal that they will reduce monitoring, for the purpose of softening ex ante competition. Thus, securitization adversely affects loan market efficiency while it leads banks to increases collectively their profits. This effect is driven by primary loan market competition, not by the exploitation of informational asymmetries in the secondary market for loans.","PeriodicalId":440574,"journal":{"name":"ERN: Asymmetric & Private Information (Topic)","volume":"32 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-07-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133917901","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}
Moral hazard models with hidden saving decisions are useful to study such diverse problems as unemployment insurance, income taxation, executive compensation, or human capital policies. How can we solve such models? In general, this is very difficult. Under the conditions derived in this paper, however, we can replace the incentive constraint with the associated first-order condition. This allows the application of simple Lagrangian methods and yields a precise characterization of optimal contracts. To obtain tractable conditions for the validity of this approach, the paper draws on the concept of log-convexity. Since logconvexity, unlike convexity, is preserved under multiplication, the paper is able to separate the assumptions on the output distribution from the assumptions on the agent’s preferences in a sense, even though the interaction between these two is important for the agent’s incentives. The first-order approach is valid if the following conditions hold: a) the agent has nonincreasing absolute risk aversion (NIARA) utility, b) the output technology has monotone likelihood ratios (MLR), and c) the distribution function of output is log-convex in effort (LCDF). Finally, the paper shows how the curvature of optimal wage schemes can be used to relax the above conditions.
{"title":"The First-Order Approach to Moral Hazard Problems with Hidden Saving","authors":"S. Koehne","doi":"10.2139/ssrn.1444780","DOIUrl":"https://doi.org/10.2139/ssrn.1444780","url":null,"abstract":"Moral hazard models with hidden saving decisions are useful to study such diverse problems as unemployment insurance, income taxation, executive compensation, or human capital policies. How can we solve such models? In general, this is very difficult. Under the conditions derived in this paper, however, we can replace the incentive constraint with the associated first-order condition. This allows the application of simple Lagrangian methods and yields a precise characterization of optimal contracts. To obtain tractable conditions for the validity of this approach, the paper draws on the concept of log-convexity. Since logconvexity, unlike convexity, is preserved under multiplication, the paper is able to separate the assumptions on the output distribution from the assumptions on the agent’s preferences in a sense, even though the interaction between these two is important for the agent’s incentives. The first-order approach is valid if the following conditions hold: a) the agent has nonincreasing absolute risk aversion (NIARA) utility, b) the output technology has monotone likelihood ratios (MLR), and c) the distribution function of output is log-convex in effort (LCDF). Finally, the paper shows how the curvature of optimal wage schemes can be used to relax the above conditions.","PeriodicalId":440574,"journal":{"name":"ERN: Asymmetric & Private Information (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121083047","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}
Lada A. Adamic, Celso Brunetti, J. Harris, A. Kirilenko
We apply network analysis to trace patterns of information transmission in an electronic limit order market. If market orders or large executable limit orders are submitted by informed traders, then resulting star-shaped or diamond-shaped patterns – or trading networks – should be associated with large changes in returns, smaller volume, and short duration between trades. In contrast, the execution of small limit orders from uninformed traders should result in networks with many triangular and reciprocal patterns and be associated with smaller changes in returns, larger volume and longer duration between trades. We compute a time series of trading networks using audit trail, transaction-level data for all regular transactions in the September 2008 E-mini S&P 500 futures contract – the cornerstone of price discovery for the S&P 500 Index. We find that network metrics that quantify the shape of a network are statistically significantly related to returns, volatility, volume, and duration.
{"title":"On the Informational Properties of Trading Networks","authors":"Lada A. Adamic, Celso Brunetti, J. Harris, A. Kirilenko","doi":"10.2139/ssrn.1361184","DOIUrl":"https://doi.org/10.2139/ssrn.1361184","url":null,"abstract":"We apply network analysis to trace patterns of information transmission in an electronic limit order market. If market orders or large executable limit orders are submitted by informed traders, then resulting star-shaped or diamond-shaped patterns – or trading networks – should be associated with large changes in returns, smaller volume, and short duration between trades. In contrast, the execution of small limit orders from uninformed traders should result in networks with many triangular and reciprocal patterns and be associated with smaller changes in returns, larger volume and longer duration between trades. We compute a time series of trading networks using audit trail, transaction-level data for all regular transactions in the September 2008 E-mini S&P 500 futures contract – the cornerstone of price discovery for the S&P 500 Index. We find that network metrics that quantify the shape of a network are statistically significantly related to returns, volatility, volume, and duration.","PeriodicalId":440574,"journal":{"name":"ERN: Asymmetric & Private Information (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-09-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125182062","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 study investigates whether firm innovation can be systematically traced to the CEO's performance evaluation made by boards of directors. In evaluating CEO performance, the board can (i) assess and evaluate performance on job aspects that are per-se difficult to measure and (ii) signal firm value to outsiders without having to disclose competitively sensitive details. In this paper, I argue that these features of CEO performance evaluation are central to understanding how boards motivate innovation. The first feature increases the effort allocation towards innovation, while the second feature increases the incentive intensity of equity incentives. As a result, I expect that firm innovation is positively related to the presence of board's private measures in evaluating the CEO, and more importantly, positively related to the interaction of private measures and equity incentives. Empirical results are in line with both expectations. Overall, findings suggest that boards can reduce incentive problems associated with equity ownership in high information asymmetry environments by signaling innovation without disclosing competitively sensitive details.
{"title":"The Incentive and Signaling Effects of Annual Bonus Schemes: Evidence from Firm Innovation","authors":"F. Hoppe","doi":"10.2139/ssrn.1269444","DOIUrl":"https://doi.org/10.2139/ssrn.1269444","url":null,"abstract":"This study investigates whether firm innovation can be systematically traced to the CEO's performance evaluation made by boards of directors. In evaluating CEO performance, the board can (i) assess and evaluate performance on job aspects that are per-se difficult to measure and (ii) signal firm value to outsiders without having to disclose competitively sensitive details. In this paper, I argue that these features of CEO performance evaluation are central to understanding how boards motivate innovation. The first feature increases the effort allocation towards innovation, while the second feature increases the incentive intensity of equity incentives. As a result, I expect that firm innovation is positively related to the presence of board's private measures in evaluating the CEO, and more importantly, positively related to the interaction of private measures and equity incentives. Empirical results are in line with both expectations. Overall, findings suggest that boards can reduce incentive problems associated with equity ownership in high information asymmetry environments by signaling innovation without disclosing competitively sensitive details.","PeriodicalId":440574,"journal":{"name":"ERN: Asymmetric & Private Information (Topic)","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121528920","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}
Initial applications of prediction markets (PMs) indicate they provide good forecasting instruments in many settings, such as elections, the box office, or product sales. One particular characteristic of these “first-generation” (G1) PMs is that they link the payoff value of a stock’s share to the outcome of an event. Recently, “second-generation” (G2) PMs have introduced alternative mechanisms to determine payoff values which allow them to be used as preference markets for determining preferences for product concepts or as idea markets for generating and evaluating new product ideas. Three different G2 payoff mechanisms appear in existing literature, but they have never been compared. This study conceptually and empirically compares the forecasting accuracy of the three G2 payoff mechanisms and investigates their influence on participants’ trading behavior. We find that G2 payoff mechanisms perform almost as well as their G1 counterpart, and trading behavior is very similar in both markets (i.e., trading prices and trading volume), except during the very last trading hours of the market. These results indicate that G2 PMs are valid instruments and support their applicability shown in previous studies for developing new product ideas or evaluating new product concepts.
{"title":"Second-Generation Prediction Markets for Information Aggregation: A Comparison of Payoff Mechanisms","authors":"C. Slamka, Wolfgang Jank, B. Skiera","doi":"10.2139/ssrn.1435316","DOIUrl":"https://doi.org/10.2139/ssrn.1435316","url":null,"abstract":"Initial applications of prediction markets (PMs) indicate they provide good forecasting instruments in many settings, such as elections, the box office, or product sales. One particular characteristic of these “first-generation” (G1) PMs is that they link the payoff value of a stock’s share to the outcome of an event. Recently, “second-generation” (G2) PMs have introduced alternative mechanisms to determine payoff values which allow them to be used as preference markets for determining preferences for product concepts or as idea markets for generating and evaluating new product ideas. Three different G2 payoff mechanisms appear in existing literature, but they have never been compared. This study conceptually and empirically compares the forecasting accuracy of the three G2 payoff mechanisms and investigates their influence on participants’ trading behavior. We find that G2 payoff mechanisms perform almost as well as their G1 counterpart, and trading behavior is very similar in both markets (i.e., trading prices and trading volume), except during the very last trading hours of the market. These results indicate that G2 PMs are valid instruments and support their applicability shown in previous studies for developing new product ideas or evaluating new product concepts.","PeriodicalId":440574,"journal":{"name":"ERN: Asymmetric & Private Information (Topic)","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-07-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131883068","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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