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Author: Mario Ramirez Basora
Publisher:
ISBN:
Category :
Languages : en
Pages : 128
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It can be easily argued that most, if not all, real economic settings are asymmetric in nature. Particularly, it is often the case that one or several agents possess more or better information than the rest when agreeing upon an economic transaction. Although the information economics revolution of the 1970s laid out the majority of the theoretical foundations, the effects of asymmetric information are subtle and have not been studied in some very interesting contexts, which motivate this thesis. In the first essay, which is based on joint work with Antonio Bento and Benjamin Ho, we study the problem of an uninformed regulator who wishes to use a voluntary price instrument under varying degrees of uncertainty, specifically in the context of a carbon offset market. In this scenario, a regulator offers private land owners a contract that compensates them for producing carbon offsets while minimizing adverse selection and welfare losses. The model shows that monitoring should decrease as the uncertainty of offset quality decreases, but should increase as uncertainty over agricultural productivity increases. Also, in response to those who argue that the problem of additionality is so large that carbon offsets should not be allowed in carbon regulation, the model quantifies the amount of additionality and finds that even in the case of a regulator with no information, welfare is improved by allowing offset contracts. Finally, the model offers guidance for calculating the optimal offset price as a function of the regulator's information. The second essay consists of a cardinal tournament used by a representative firm to choose its next CEO. Candidates are managers of different types: they are heterogeneous over levels of ability and risk aversion. The managers have private information about their ability. In this context, a two-dimensional solution set of levels of ability and risk aversion corresponding to each possible mean of cash flow realization is identified. Using two different specifications (CARA preferences with normally distributed cash flows, and CRRA preferences with log-normally distributed cash flows), the trade-off between managerial ability and risk aversion is found to be characterized by a concave function. Furthermore, for better levels of technology, the relative importance of risk aversion with respect to ability increases, while for worse levels of technology, the reverse holds. Finally, in the third essay, using a model based on the optimal consumption and investment models from the operations research literature, I study how the CEO characteristics studied in Chapter 2 impact dividend policy and the longrun evolution of the firm. Specifically, when assuming CRRA preferences and a concave trade-off between ability and risk aversion, I find that the optimal dividend policy of the CEO is non-monotonic with respect to risk aversion. In other words, CEOs with a combination of both high (or low) ability and risk aversion, will pay out lower dividend yields than CEOs with a more balanced combination of ability and risk aversion. Furthermore, firm survival is a function of the dividend yield and is also non-monotonic: while the probability of firm survival converges to either zero or one as risk aversion (and, by extension, ability) converges to either zero or infinity, there exists a range for which lower investment counteracts a potentially higher dividend yield, and the resulting change in the probability of survival is ambiguous.
Author: Mario Ramirez Basora
Publisher:
ISBN:
Category :
Languages : en
Pages : 128
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Book Description
It can be easily argued that most, if not all, real economic settings are asymmetric in nature. Particularly, it is often the case that one or several agents possess more or better information than the rest when agreeing upon an economic transaction. Although the information economics revolution of the 1970s laid out the majority of the theoretical foundations, the effects of asymmetric information are subtle and have not been studied in some very interesting contexts, which motivate this thesis. In the first essay, which is based on joint work with Antonio Bento and Benjamin Ho, we study the problem of an uninformed regulator who wishes to use a voluntary price instrument under varying degrees of uncertainty, specifically in the context of a carbon offset market. In this scenario, a regulator offers private land owners a contract that compensates them for producing carbon offsets while minimizing adverse selection and welfare losses. The model shows that monitoring should decrease as the uncertainty of offset quality decreases, but should increase as uncertainty over agricultural productivity increases. Also, in response to those who argue that the problem of additionality is so large that carbon offsets should not be allowed in carbon regulation, the model quantifies the amount of additionality and finds that even in the case of a regulator with no information, welfare is improved by allowing offset contracts. Finally, the model offers guidance for calculating the optimal offset price as a function of the regulator's information. The second essay consists of a cardinal tournament used by a representative firm to choose its next CEO. Candidates are managers of different types: they are heterogeneous over levels of ability and risk aversion. The managers have private information about their ability. In this context, a two-dimensional solution set of levels of ability and risk aversion corresponding to each possible mean of cash flow realization is identified. Using two different specifications (CARA preferences with normally distributed cash flows, and CRRA preferences with log-normally distributed cash flows), the trade-off between managerial ability and risk aversion is found to be characterized by a concave function. Furthermore, for better levels of technology, the relative importance of risk aversion with respect to ability increases, while for worse levels of technology, the reverse holds. Finally, in the third essay, using a model based on the optimal consumption and investment models from the operations research literature, I study how the CEO characteristics studied in Chapter 2 impact dividend policy and the longrun evolution of the firm. Specifically, when assuming CRRA preferences and a concave trade-off between ability and risk aversion, I find that the optimal dividend policy of the CEO is non-monotonic with respect to risk aversion. In other words, CEOs with a combination of both high (or low) ability and risk aversion, will pay out lower dividend yields than CEOs with a more balanced combination of ability and risk aversion. Furthermore, firm survival is a function of the dividend yield and is also non-monotonic: while the probability of firm survival converges to either zero or one as risk aversion (and, by extension, ability) converges to either zero or infinity, there exists a range for which lower investment counteracts a potentially higher dividend yield, and the resulting change in the probability of survival is ambiguous.
Author: Benedikt Mihm
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Bradyn Mitchel Breon-Drish
Publisher:
ISBN:
Category :
Languages : en
Pages : 194
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This dissertation studies the effects of asymmetric information and learning on asset prices and investor decision-making. Two main themes run through the work. The first is the linkage between investor decisions and the information used to make those decisions; that is, portfolio choices reflect the nature and quality of available information. The second theme is the interaction between investor learning and price informativeness. The information held by individual investors is reflected in market prices through their trading decisions, and prices thus transmit this information to other investors. In the first chapter, Asymmetric Information in Financial Markets: Anything Goes, I study a standard Grossman and Stiglitz (1980) noisy rational expectations economy, but relax the usual assumption of the joint normality of asset payoff and supply. The primary contribution is to characterize how the equilibrium relation between price and fundamentals depends on the way in which investors react to the information contained in price. My solution approach dispenses with the typical "conjecture and verify" method, which allows me to analytically solve an entire class of previously intractable nonlinear models that nests the standard model. This simple generalization provides a purely information-based channel for many common phenomena. In particular, price jumps and crashes may arise endogenously, purely due to learning effects, and observation of the net trading volume may be valuable for investors in the economy as it can provide a refinement of the information conveyed by price. Furthermore, the value of acquiring information may be non-monotonic in the number of informed traders, leading to multiple equilibria in the information market. I show also that the relation between investor disagreement and returns is ambiguous and depends on higher moments of the return distribution. In short, many of the standard results from noisy rational expectations models are not robust. I introduce monotone likelihood ratio conditions that determine the signs of the various comparative statics, which represents the first demonstration of the implicit importance of the MLRP in the noisy rational expectations literature. In the second chapter Do Fund Managers Make Informed Asset Allocation Decisions?, a joint work with Jacob S. Sagi, we derive a dynamic model in which mutual fund managers make asset allocation decisions based on private and public information. The model predicts that the portfolio market weights of better informed managers will mean revert faster and be more variable. Conversely, portfolio weights that mean revert faster and are more variable should have better forecasting power for expected returns. We test the model on a large dataset of US mutual fund domestic equity holdings and find evidence consistent with the hypothesis of timing ability, especially at three- to 12-month forecasting horizons. Nevertheless, whatever timing ability may be reflected in portfolio weights does not appear to translate into higher realized returns on funds' portfolios.
Author: Claudio Cristian Bravo Ortega
Publisher:
ISBN:
Category :
Languages : en
Pages : 286
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Author: Matthew Robertson
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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In three distinct, yet interrelated, essays I examine the effects of asymmetric information and imperfect information on economic decision makers' incentives and behaviour. To do so I employ, and modify, the methodology of Bayesian games.In chapter one, I analyse an unconventional contest inspired by the real world.In this contest, players are ranked by a scoring rule based on both their realised performance and how close this performance is to a target set before the contest,which is private information. I elucidate and analyse the incentive properties of these rules then characterise the equilibrium behaviour of the players.In chapter two, I integrate aspects from adverse selection and moral hazard models to provide a unied theory of securitisation under asymmetric information.I show that introducing skin in the game increases signalling costs for originators who performed sufficient due-diligence yet still improves incentives by making high effort relatively more likely. I relax the conventional assumption of risk neutrality and show that risk-sharing concerns are sufficient for the aforementioned qualitative properties of equilibrium to hold. Finally, I demonstrate that, depending on the severity of the originator's preference for liquidity or need to share risk, each setting may be more conducive for signalling.In chapter three, I propose a simple and intuitive way to transform canonical signalling games with exogenous types into games in which the informed agent endogenously generates her private information through an unobservable costly effort decision. I provide portable results on the differentiability of action functions and existence of equilibrium. I then apply these results to classic models of security design and the job market to demonstrate the practical usefulness of endogenous effort. In particular, my approach in these applications lends theoretical support to stylised facts that cannot be derived from the standard signalling framework.
Author: Jorge García
Publisher: Goteborg University
ISBN:
Category : Disclosure of information
Languages : en
Pages : 142
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Author: Chaoli Guo
Publisher: Open Dissertation Press
ISBN: 9781361276532
Category :
Languages : en
Pages :
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This dissertation, "Three Essays on Capital Market With Incomplete and Asymmetric Information" by Chaoli, Guo, 郭朝莉, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: This thesis includes one essay on incomplete information and two essays on the capital market implications of asymmetric information. The acquisition of information and its dissemination to all economic units are central activities in capital markets. Limits to information diffusion may exist when market participants have limited processing ability or when market structure causes information asymmetry to persist. Merton (1987) proposes a simple capital market equilibrium model with incomplete information, in which difference in a stock's investor recognition affects its cost of capital. Myers and Majluf (1984) lay out the theoretical foundation for the role of asymmetric information in corporate finance and its capital market implications. The first essay tests and offers support to Merton's (1987) theory. In the U.S. market, using the breadth of ownership among retail investors as a proxy for investor recognition, I show that a long-short portfolio based on the annual change of shareholder base earns a compounded annual abnormal return of 6.42% after controlling for the Fama-French three factors. These results are more pronounced among young, low visibility and high idiosyncratic volatility stocks. Moreover, I present evidence that the investor recognition effect can explain approximately 20% of the puzzling net equity issuance effect documented by Pontiff and Woodgate (2008). The second essay suggests a novel signaling mechanism in the framework of asymmetric information. When a firm's convertible debt is issued, it is not only determined by the fundamentals of the firm such as past stock performance, but also related to whether this performance is realized during the tenure of current CEO who decides the issues. I define the performance that the current CEO achieves in the firm ever since the CEO comes to the helm as CEO-specific performance. Higher CEOspecific performance leads to (1) a higher probability of convertible issues, and (2) a less negative abnormal stock return in response to the convertible issue announcement, controlling for other firm characteristics. These evidences indicate that CEO-specific performance serves as a credible information signal to influence the adverse selection costs between the firm and outside investors in convertible bond financing. The third essay explores the possibility of asymmetric information in explaining the pronounced share issue anomaly in the cross-sectional variations of stock returns, as documented by Pontiff and Woodgate (2008). A lot of equity share issue and repurchase actions are actively determined by the decision of corporate stakeholders, such as employees at the stock options exercises. As these stakeholders hold a large amount of private information about the firm, it is in their optimal decisions to try to time the exercise of their share purchase activity, but outside investors are likely to fail to interpret the information revealed from these actions. I present strong evidence that a negative relation between share issues and stock returns is affected to a greater extent when the information asymmetry problem is more severe. DOI: 10.5353/
Author: Shino Takayama
Publisher:
ISBN:
Category :
Languages : en
Pages : 324
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Author: György Venter
Publisher:
ISBN:
Category :
Languages : en
Pages :
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This thesis contains three essays exploring the asset pricing implications of asymmetric information and trading constraints. Chapter 1 studies how short-sale constraints affect the informational efficiency of market prices and the link between prices and economic activity. I show that under short-sale constraints security prices contain less information. However, short-sale constraints increase the informativeness of prices to some agents who learn about the quality of an investment opportunity from market prices and have additional private information. This, in turn, can lead to higher allocative efficiency in the real economy. My result thus implies that the decrease in average informativeness due to short-sale constraints can be more than compensated by an increase in informativeness to some agents. In Chapter 2, I develop an equilibrium model of strategic arbitrage under wealth constraints. Arbitrageurs optimally invest into a fundamentally riskless arbitrage opportunity, but if their capital does not fully cover losses, they are forced to close their positions. Strategic arbitrageurs with price impact take this constraint into account and try to induce the fire sales of others by manipulating prices. I show that if traders have similar proportions of their capital invested in the arbitrage opportunity, they behave cooperatively. However, if the proportions are very different, the arbitrageur who is less invested predates on the other. The presence of other traders thus creates predatory risk, and arbitrageurs might be reluctant to take large positions in the arbitrage opportunity in the first place, leading to an initially slow convergence of prices. Chapter 3 (joint with Dömötör Pálvölgyi) studies the uniqueness of equilibrium in a textbook noisy rational expectations economy model a la Grossman and Stiglitz (1980). We provide a very simple proof to show that the unique linear equilibrium of their model is the unique equilibrium when allowing for any continuous price function, linear or not. We also provide an algorithm to create a (non-continuous) equilibrium price that is different from the Grossman-Stiglitz price.
Author: Jia Xiang
Publisher:
ISBN:
Category :
Languages : en
Pages :
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I empirically investigate the welfare consequences of asymmetric information in the context of physician-patient interaction in medical treatment decisions and consumers' adverse selection in credit card lending. In chapter 1, with health insurance claims data for a large district in China, I empirically show that physicians respond to their financial incentives, using their informational advantage to influence patients' treatment choices. Difference-in-Differences analysis shows that, for a diagnosis for which surgical treatment is somewhat discretionary, surgery were chosen nearly three times as often after an increase in physicians' remuneration differential between surgical and non-surgical treatment, with no change in health outcomes. The effect was 1.5 times larger for more insured patients. Chapter 2 first characterizes the physician-patient interaction formally using a Bayesian persuasion framework and test the model's main implications. I then estimate a parameterized version of the model to calculate the value of fully informing patients about the relative value of treatment options. Over half of the surgery patients would not have done so were they fully informed, whereby total welfare rises by 89 percent. In chapter 3, by analyzing unique data from a randomized balance transfer market experiment in the U.S., I show that conditional on price, higher risk types are more willing to take up an offer.The annual welfare loss due to adverse selection is estimated to be at least $12 per U.S. credit cardholder. In addition, the FICO score captures 90 percent of the welfare loss due to adverse selection.
