By Preston Jiateng Huang
This paper sets out to examine the effect of leverage on company performance. Drawing on the methodology of key prior research, this study finds that leverage has a consistent negative effect on firm growth; by contrast, no such negative impact was found on return on equity. Importantly, such patterns hold throughout the entire period under study (1970-2017), during which several disruptive economic events have occurred. These results highlight the importance of selecting appropriate company performance measures when studying the effect of debt load on a firm as well as the misalignment of incentives for policymakers and company management. Other implications are also discussed.
Advisor: Professor Kyle Jurado | JEL Codes: G24; G31; G32
By Ryan Westphal
This paper proposes a model describing the incentive issues faced by prin-
cipals and agents when the agent has limited liability and is capable of un-
dertaking unidentifiable, inefficient risky behavior. We propose a contract
structure by which the principal deters risk by deferring payment to the
agent until she reaches an absorbing steady-state in which promised equity
alone deters inefficient behavior. The paper discusses the effect of exogenous
parameters on the tradeoffs facing the principal as well as the implications
they have on the efficient choice of contract. We also outline extensions to
the model in which the principal has access to a costly monitoring technology
to identify inefficient risk taking. The theoretical results have implications
for real-world employment contracts and practices in financial firms such as
investment banks and private equity funds.
Advisor: Curtis Taylor | JEL Codes: D82, D86, G32, L14 | Tagged:
By Shane Hunt
This paper explores a previously overlooked unintended consequence of a private bank accepting Central Bank loans as a lender of last resort. Applying the basic Markowitz Security Model, I explore the potential effect of a private bank accepting a Central Bank loan as a signal of increased risk of investment in that private bank to the private markets. Finding a possibility that private investors will charge a penalty risk premium for having sought Central Bank financing, I consider the effects of this premium in three different game theoretic scenarios, each with a different set of assumptions that could apply in different Economic settings. Depending on the specific environment, possible effects include dependence on Central Bank financing, bankruptcy, or an eventual return to the private financial markets for future funding.
Advisor: Marjorie McElroy, Nir Jaimovich | JEL Codes: E58, G02, G21, G28, G32 | Tagged:
By Matt LoSardo
In theory a reverse takeover (RTO) should be a viable alternative to initial public offerings (IPO) for private companies looking to access the public capital markets. Since the IPO process can be very timely and include significant costs, both direct and indirect, we analyze reverse takeovers as an alternative method. Recent papers have posed some similar questions, evaluating underpricing and market-timing, which we look to confirm. However, our paper seeks to build on these analyses, with a particular focus on long-term returns for RTO stocks. Overall we find that reverse takeovers can be successfully used instead of IPOs and should be sustainable long-term investments.
Advisor: Edward Tower, Marjorie McElroy | JEL Codes: G12, G24, G32, G34 | Tagged: