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| FINANCING BIDDERS IN TAKEOVER CONTESTS Journal of Financial Economics 117(3), 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 22(5), 2018, 1667–1704. (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 PERSPECTIVE with Roman Inderst Management Science 65(11), 2019, 5411-5426. (download/ from journal) 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 65(11), 2019, 5290-5307. (download/ from journal) 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, SEVERANCE PAY, AND TURNOVER (download) AFA Annual Meeting 2018 Abstract | |
| Managers are often hired with renewable fixed-term contracts. This paper proposes why these contracts are optimal and what determines their length. Longer contracts, offering severance pay for premature termination, facilitate a better match between firms and managers. However, the cost is that severance pay must increase with the contract's length. Shorter renewable contracts reduce the need for severance pay, but may encourage window dressing in renewal periods. The insight that factors affecting severance pay, such as managers' outside options, affect contract length is supported by the evidence and explains puzzling stylized facts related to hiring and replacing managers. |
| "COLLUSION" WITH PUBLIC AND PRIVATE OWNERSHIP AND INNOVATION with Arnoud Boot (download) SFS Cavalcade 2018, EFA Annual Meeting 2018 Abstract | |
| Head-to-head competition hurts profitability, and firms can benefit from avoiding it. Our model argues that strict transparency requirements help public firms soften competition and studies how that affects innovation aimed at displacing rivals. We show that intermediately attractive innovation thrives best in private firms, as opportunities to soften competition on existing t echnologies undermine public firms' commitment to innovation. However, being public dominates if innovating is either unattractive or highly attractive. In the latter case, public firms try to displace rivals by innovating but avoid competition when lacking a technological edge. Our predictions explain conflicting evidence regarding innovation in public firms. |
| FINANCING SKILLED LABOR (download) WFA Annual Meeting 2019, Cambridge Corporate Finance Theory Symposium Abstract | |
| This paper asks why some firms offer non-executive workers fixed wages, guaranteed by external financing, while others make investors out of workers by offering equity-based compensation. The model shows that worker bargaining power plays a key role. When firms compete for skilled labor, workers demand equity-based compensation. Though such compensation exposes workers to negative events beyond their control and can lead to "workers runs," workers do not internalize this cost when individually negotiating their wages. External financing avoids this problem, but makes cash-constrained firms compete more aggressively. The model's predictions explain evidence relating worker bargaining power to wage structure. |