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| FINANCING BIDDERS IN TAKEOVER CONTESTS Journal of Financial Economics 117(3), September 2015, 534–557. (download/ from journal) EFA Annual Meeting 2012 Abstract | |
| This paper argues that endogenizing the choice of financing for cash bids is just as important as endogenizing the payment method in takeovers. The paper shows that acquirers issue equity to finance their cash bids only if they lack access to competitive financing. This leads to underbidding and lower takeover premiums. The opposite holds for debt financing, which leads to overbidding. Endogenizing the payment method reveals that equity bids carry lower premiums than cash bids financed at competitive terms. The model's insights find preliminary empirical support and could help explain existing evidence, which seems at odds with prior theory. |
| INDIRECT COSTS OF FINANCIAL DISTRESS AND BANKRUPTCY LAW: EVIDENCE FROM TRADE CREDIT AND SALES with Zacharias Sautner
Review of Finance, forthcoming (download/ from journal) AFA Annual Meeting 2014, EFA Annual Meeting 2009 Abstract | |
| We argue that stronger debt enforcement in bankruptcy can reduce indirect costs of financial distress: (i) by increasing the likelihood of restructuring outside bankruptcy and (ii) by improving the recovery rate of stakeholders, such as trade creditors, through explicit legal provisions. Consistent with these predictions, we find that when debt enforcement is stronger, financially distressed firms are less exposed to indirect distress costs in the form of reduced access to trade credit and forgone sales. We document these effects in a panel of firms from 40 countries with heterogeneous debt enforcement characteristics and in differences-in-differences tests exploiting several recent bankruptcy reforms. |
| GROWTH FIRMS AND RELATIONSHIP FINANCE: A CAPITAL STRUCTURE APPROACH with Roman Inderst Management Science, accepted (download) AFA Annual Meeting 2014 Abstract | |
| We analyze how relationship finance, such as venture capital and relationship lending, affects growth firms' capital structure choices. We show that relationship investors that obtain a strong bargaining position due to their privileged information about the firm, optimally cash in on their dominance by pushing it to finance follow-up investments with equity. The firm underinvests if its owner refuses to accept the associated dilution. However, this problem is mitigated if the firm's initial relationship financing involves high leverage or offers initial investors preferential treatment in liquidation. By contrast, if initial investors are unlikely to gain a dominant position, firms optimally lever up only in later rounds. Our implications for relationship and venture capital financing highlight that the degree of investor dominance is of key importance for growth firms' capital structure decisions. |
| (NON-)PRECAUTIONARY CASH HOARDING AND THE EVOLUTION OF GROWTH FIRMS with Arnoud Boot Management Science, accepted (download) AFA Annual Meeting 2016, AEA Annual Meeting 2015 Abstract | |
| We analyze whether growth firms should delay current investment to hoard cash in order to reduce dilution from external financing. This hoarding motive is the natural counterpart to saving cash as a precaution to help secure funding for future investment opportunities. However, the two motives lead to fundamentally different implications for hoarding and for how cash interacts with key financial and investment decisions. In particular, our paper contributes to understanding why firms choosing private over public financing hoard less, and why product market competition has an ambivalent impact on the public-private choice. |
| CONTRACT HORIZON AND TURNOVER (download) AFA Annual Meeting 2018 Abstract | |
| This paper develops a model in which a principal hires agents whose fit with the firm changes over time. Agents are better informed about such changes, so the principal must decide how to elicit information that could lead to an agent's dismissal. The paper rationalizes the use of renewable fixed-term contracts as a mechanism that periodically switches from relying on severance pay to relying on firm performance on renewal dates to sort out agents. The paper's key implications focus on the determinants of contract horizon. Furthermore, it sheds light on several puzzling stylized facts concerning hiring and replacement practices. |
| COLLUSION WITH PUBLIC AND PRIVATE OWNERSHIP AND INNOVATION with Arnoud Boot (download) SFS Cavalcade 2018, EFA Annual Meeting 2018 Abstract | |
| We argue that public ownership helps firms avoid head-to-head competition. However, collusion opportunities on existing technologies reduce the commitment to develop new ones, and could destroy firm value. We show that the latter effect dominates when a new technology's expected profitability is intermediate, in which case private ownership is optimal. Opportunities to avoid competition increase firm value when new technologies appear either only marginally or very attractive, resulting in a U-shaped relation between the attractiveness of innovation and public ownership. While buying equity stakes also reduces competition, it is an imperfect substitute. Our main predictions are consistent with empirical patterns and shed light on several puzzling stylized facts. |
| PRESERVING 'DEBT CAPACITY' OR 'EQUITY CAPACITY': A DYNAMIC THEORY OF SECURITY DESIGN UNDER ASYMMETRIC INFORMATION (2012) with Roman Inderst (download) 4th Paris Spring Corporate Finance Conference Abstract | |
| In a dynamic model of optimal security design, we show when firms should preserve "equity capacity" through choosing high target leverage or "debt capacity" through choosing low target leverage. Thereby, firms reduce a problem of underinvestment or overinvestment when they must raise future financing under asymmetric information. Which problem arises depends on whether additional financing is raised at competitive terms or whether there is a lock-in with initial investors. Firms initial (or target) capital structure matters as it affects the "outside option" of both insiders and outside investors. Our theory also entails implications for start-up and venture capital financing. |