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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, forthcoming (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, forthcoming (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, SEVERANCE PAY, AND TURNOVER (download) AFA Annual Meeting 2018 Abstract | |
| Firm executives are often hired with renewable fixed-term contracts. This paper asks why and what determines the length of such contracts. The paper develops a model in which the fit between a firm and its managers changes over time. Stipulating severance pay for premature dismissal in a given period mitigates managers' incentives to conceal a deteriorating fit but increases these incentives in preceding periods. By optimally choosing the length of renewable fixed-term contracts, boards can manage the use and effectiveness of severance pay. The relation between contract length, severance pay, and managers' outside options helps explain several puzzling stylized facts. |
| COLLUSION WITH PUBLIC AND PRIVATE OWNERSHIP AND INNOVATION with Arnoud Boot (download) SFS Cavalcade 2018, EFA Annual Meeting 2018 Abstract | |
| We argue that, by enforcing the regular provision of vetted information, public ownership can help firms coordinate strategy to avoid head-to-head competition. Such "collusion" opportunities increase the profitability of existing technologies, but may hurt innovation incentives. We show that collusion opportunities benefit firms that either do not consider innovating attractive or consider innovating very attractive. For moderately attractive innovation opportunities, private ownership dominates. By making it harder to coordinate with rivals, private ownership helps firms overcome time inconsistency problems related to abandoning innovation too easily. Firms' incentives to grow are also affected. Our predictions shed light on several puzzling stylized facts. |
| FINANCING SKILLED LABOR (download) Cambridge Corporate Finance Theory Symposium Abstract | |
| This paper analyzes why some cash-constrained firms offer non-executive workers fixed wages, secured by external financing, while others effectively use worker financing by offering equity-based compensation. The model shows that worker bargaining power plays a key role. When firms compete for their labor, workers demand equity-based compensation. However, such compensation entails a social cost, as it increases the risk that workers subsequently run on the firm. Guaranteeing fixed wages through external financing avoids this problem, but makes cash-constrained firms more aggressive than unconstrained firms. Using shocks to workers' bargaining power, the paper shows strong empirical support for the predicted relation between worker bargaining power and worker financing. |