Tips to navigate the program:
- Overview of all papers on a specific day: click on the day (e.g. Date: Thursday, 24/Aug/2017). To download papers, you will need to access the session by clicking on its title first.
- Program index: click on the Authors tab below.
- Location name: to display all sessions taking place in that room
- Search box: to search for authors, papers and sessions.
Please notes that changes in the program might occur.
If your name is not displayed in the program, please register in our conference system.
If your paper information is not up to date, please send us an email at email@example.com.
CFGT-5: Risk Taking and Risk Management
Short-Term Debt and Incentives for Risk-Taking
1APG Asset Management; 2EPFL; 3Federal Reserve Board
We challenge the commonly accepted view that short-term debt curbs moral hazard and show that, in a world with financing frictions, short-term debt does not decrease but instead increases incentives for risk-taking. To demonstrate this result and examine its implications, we formulate a model in which firms face taxation, financing frictions, and default costs. Using this model, we show that short-term debt amplifies shocks, increases default risk, and can give rise to a rollover trap, a scenario in which firms burn cash to cover severe rollover losses. In the rollover trap, shareholders hold an option that is out-of-the-money, which provides them with risk-taking incentives.
Inventory and Corporate Risk Management
1University of Bologna; 2University of Warwick
We calibrate a dynamic structural model to examine the role of inventory, together with cash holdings, in corporate risk management. We show that inventory and cash holdings are synergic tools. The first is a valuable operational hedge against commodity price risk, besides offering a costly reserve of liquidity. The second contributes to risk management in states in which storage is ineffective. In the presence of external financing costs, cash holdings support inventory investment enhancing the hedge offered by inventory. With the model, we are able to rationalize the empirical incidence of inventory and cash holdings in the cross-section of U.S. manufacturing corporations, which shows that savings and storage of raw materials are both positively related to financing constraints and cash flow risk.
Optimal Contracting with Unobservable Managerial Hedging
1Shanghai Jiao Tong University; 2London School of Economics
We develop a continuous-time model where a risk-neutral principal contracts with a CARA agent to initiate a project. The agent can increase the drift of the project's output by exerting costly hidden effort. In addition, the agent can trade the market portfolio and a risk-free bond in an unobservable private account (the managerial hedging behavior). By a meticulous mathematical construction, we are able to solve both the agent's utility maximization problem and the principal's optimal contracting problem through the first-order approach. In the optimal contract, the agent's contract value serves as the unique state variable for the principal to pin-down the optimal contract. The optimal payment to the agent takes the form of an impulse compensation like that in Demarzo and Sannikov (2006). However, the optimal effort and incentive compensation are highly dynamic in our model as in Sannikov (2008). We show that unobservable managerial hedging under absolute performance evaluation is costly for incentive provision in that the principal's value generally decreases with the easiness of managerial hedging. Replacing an absolute performance evaluation contract by a relative one can improve both efficiency and value. Finally, we implement the optimal contract by cash reserve, private debt and private equity in an entrepreneurship context. Dynamic balance sheet, values and market prices of securities are derived and analyzed.
Contact and Legal Notice · Contact Address:
Conference: EFA 2017
|Conference Software -
ConfTool Pro 2.6.109+TC
© 2001 - 2017 by H. Weinreich, Hamburg, Germany