Are Novice Private Equity Funds Risk-Takers? Evidence From a Comparison with Established Funds


Journal of Corporate Finance: Contracting, Governance and Organization

août 2014, vol. 27, pp.55-71

Départements : Finance

Mots clés : Private equity funds, Venture capital, Buyouts, Learning, Reputation, Risk-taking

This paper explores whether private equity firms that are new to the industry take excessive risks relative to funds from established firms. We use differences between the implicit incentives of managers of experienced and of novice funds as an identification strategy. We find that novice funds invest more slowly than experienced funds, contradicting the risk-taking hypothesis. However, the size of their investments, in value and as fraction of fund size, is larger; this could be consistent with risk-shifting by novice funds but also with alternative hypotheses. We find that the size difference increases over time and is absent from buyout investments. We also find that novice funds tend to underperform most dramatically for early large investments, and that the size of their investments increases after a first successful exit. These and other findings are in conflict with the excessive risk-taking hypothesis, but largely consistent with alternative explanations that emphasize differences in expertise

Asynchronicity and coordination in common and opposing interest games


Theoretical Economics

mai 2014, vol. 9, n°2, pp.409-434

Départements : Finance, GREGHEC (CNRS)

Mots clés : Revision games, Pre-opening, finite horizon, Equilibrium selection, Asynchronous moves

We study games endowed with a pre-play phase in which players repare the actions that will be implemented at a predetermined deadline. In the preparation phase, each player stochastically receives opportunities to revise her actions, and the ?nally-revised action is taken at the deadline. In 2-player “common interest” games, where there exists a best action pro?le for all players, this best action pro?le is the only equilibrium outcome of the dynamic game. In “opposing interest” games, which are 2 × 2 games with Pareto-unranked strict Nash equilibria, the equilibrium outcome of the dynamic game is generically unique and corresponds to one of the stage-game strict Nash equilibria. Which equilibrium prevails depends on the payo? structure and on the relative frequency of the arrivals of revision opportunities for each of the players.

CEO Optimism and Incentive Compensation


Journal of Financial Economics

novembre 2014, vol. 114, n°2, pp.366-404

Départements : Finance

Mots clés : CEO optimism, Incentive compensation, Compensation contract

I study the effect of chief executive officer (CEO) optimism on CEO compensation. Using data on compensation in US firms, I provide evidence that CEOs whose option exercise behavior and earnings forecasts are indicative of optimistic beliefs receive smaller stock option grants, fewer bonus payments, and less total compensation than their peers. These findings add to our understanding of the interplay between managerial biases and remuneration and show how sophisticated principals can take advantage of optimistic agents by appropriately adjusting their compensation contracts

CEO Pay and Firm Size: An Update After the Crisis

Xavier Gabaix, A. LANDIER, Julien Sauvagnat

Economic Journal

février 2014, vol. 124, n°574, pp.F40-F59

Départements : Finance

In the ‘size of stakes’ view quantitatively formalised in Gabaix and Landier (Quarterly Journal of Economics, 121(1):49–100, 2008), CEO compensation reflects the size of firms affected by talent in a competitive market. The years 2004–11 were not part of the initial study and offer a laboratory to examine the theory with new positive and negative shocks. Executive compensation (measured ex ante) did closely track the evolution of average firm value, supporting the ‘size of stakes’ view out of sample. During 2007–9, firm value decreased by 17%, and CEO pay by 28%. During 2009–11, firm value increased by 19% and CEO pay by 22%

Epistemological foundations for the assessment of risks in banking and finance


Journal of Economic Methodology

2014, vol. 21, n°2, pp.125-138

Départements : Finance, GREGHEC (CNRS)

Mots clés : financial crises, causal process, forecasting, research program, risk

Equilibrium Discovery and Preopening Mechanisms in an Experimental Market


Management Science

mars 2014, vol. 60, n°3, pp.753-769

Départements : Finance

Mots clés : cheap talk; experimental markets; equilibrium discovery; preopening period; preplay communication

We experimentally analyze how to design preopening mechanisms facilitating coordination on high equilibrium liquidity and gains from trade. We allow a call auction to be preceded by a preopening or not, preopening orders to be binding or not, and the opening time to be deterministic or random. When the preopening is nonbinding, traders place manipulative orders, reducing the credibility of preplay communication. Random market opening deters manipulation, but also hinders communication by making it costly. Gains from trade are maximized when preopening orders are binding. This enables some traders to place early limit orders, attracting further liquidity

Equilibrium Pricing and Trading Volume under Preference Uncertainty


Review of Economic Studies

octobre 2014, vol. 81, n°4, pp.1401-1437

Départements : Finance, GREGHEC (CNRS)

Mots clés : Information processing, Trading volume, Liquidity shock, Preference uncertainty, Equilibrium pricing

Information collection and processing in financial institutions is challenging. This can delay the observation by traders of the exact capital charges and constraints of their institution. During this delay, traders face preference uncertainty. In this context, we study optimal trading strategies and equilibrium prices in a continuous centralized market. We focus on liquidity shocks, during which preference uncertainty is likely to matter most. Preference uncertainty generates allocative inefficiency, but need not reduce prices. Progressively learning about preferences generate round–trip trades, which increase volume relative to the frictionless market. In a cross section of liquidity shocks, the initial price drop is positively correlated with total trading volume. Across traders, the number of round–trips is negatively correlated with trading profits and average inventory

Freedom of choice between unitary and two-tier boards: An empirical analysis


Journal of Financial Economics

juin 2014, vol. 112, n°3, pp.364-385

Départements : Finance

Mots clés : Board of directors; Two-tier board; Unitary board; Corporate governance; Monitoring

We examine board structure in France, which since 1966 has allowed firms the freedom to choose between unitary and two-tier boards. We analyze how this choice relates to characteristics of the firm and its environment. Firms with severe asymmetric information tend to opt for unitary boards; firms with a potential for private benefits extraction tend to adopt two-tier boards. Chief executive officer turnover is more sensitive to performance at firms with two-tier boards, indicating greater monitoring. Our results are broadly consistent with the Adams and Ferreira (2007) model and suggest that gains result from allowing freedom of contract about board structure

HFT and Market Quality


Bankers, Markets & Investors

janvier-février 2014, n°128, pp.5-19

Départements : Finance, GREGHEC (CNRS)

Illiquidity Contagion and Liquidity Crashes


Review of Financial Studies

juin 2014, vol. 27, n°6, pp.1615-1660

Départements : Finance, GREGHEC (CNRS)

Liquidity providers often learn information about an asset from prices of other assets. We show that this generates a self-reinforcing positive relationship between price informativeness and liquidity. This relationship causes liquidity spillovers and is a source of fragility: a small drop in the liquidity of one asset can, through a feedback loop, result in a very large drop in market liquidity and price informativeness (a liquidity crash). This feedback loop provides a new explanation for comovements in liquidity and liquidity dry-ups. It also generates multiple equilibria