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ABSTRACT A continuous-time agency model is explored where the agent has loss-aversion preferences. Regardless of whether the reference point is formulated exogenously or endogenously, we show that the optimal contract includes a part that... more
ABSTRACT A continuous-time agency model is explored where the agent has loss-aversion preferences. Regardless of whether the reference point is formulated exogenously or endogenously, we show that the optimal contract includes a part that is less sensitive to the agent's continuation payoff; however, this part is preceded and followed by a range of option-type payoffs. Furthermore, the introduction of loss aversion induces investors to reward the agent earlier, and to use a higher-powered incentive scheme. Implementing the optimal contract through a combination of equity, long-term debt, and a line of credit, we provide possible explanations for the evolution of CEO compensation with a low level of stability of CEOs' equity ownership in the United States, and for corporate dividend-smoothing policy.
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In this paper, we adapt a continuous-time agency model to incorporate the loss-aversion preferences of agents. To this end, by distinguishing between the gains in capital and income driven by variations in the agent's continuation... more
In this paper, we adapt a continuous-time agency model to incorporate the loss-aversion preferences of agents. To this end, by distinguishing between the gains in capital and income driven by variations in the agent's continuation payoff, we provide a theoretical model which overcomes the problem that the loss of utility arising from loss aversion disappears entirely with a continuous-time limit. We then show that the optimal contract includes part that is strictly positive but insensitive to the agent's continuation payoff, and part that encompasses a range of option-type payoffs. Implementing the optimal contract using a combination of equity, long-term debt, and a line of credit, we also predict that dividend payments are insensitive to changes in the firm's performance as long as its performance is moderately good. In addition, we derive some relations between dividends, the credit line balance (equity value), the limit of the credit line, and long-term debt. These r...
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This paper considers how managers choose the timing of investment in risky but value-increasing projects with a liquidation possibility for their firm when their personal objectives are not aligned with those of shareholders but their... more
This paper considers how managers choose the timing of investment in risky but value-increasing projects with a liquidation possibility for their firm when their personal objectives are not aligned with those of shareholders but their compensation is endogenously determined. Using a real options approach for a broad class of managerial preferences, we show that without hidden information, the startup of the project is more likely to be delayed with a higher liquidation possibility, whereas the grant size of stock-based managerial compensation is independent of the liquidation possibility but is decreasing in the volatility of the firm's cash flow stream and the degree of managerial impatience if the manager is risk neutral. We also indicate that restricted stock is optimal in a general class of compensation schedules, regardless of the manager's risk preferences. Further, if there exists hidden information on the volatility of project returns and if the risk-neutral manager is as impatient as the shareholders, the equilibrium must be pooling. Then, the startup of the high- (low-)volatility project is advanced (delayed) in comparison with the case without hidden information.
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We explore an equilibrium allocation and efficiency when private firms are listed by merging with a SPAC, compared with those when they are listed through a traditional IPO. We show that a traditional IPO is more informationally efficient... more
We explore an equilibrium allocation and efficiency when private firms are listed by merging with a SPAC, compared with those when they are listed through a traditional IPO. We show that a traditional IPO is more informationally efficient than a SPAC, except if the traditional IPO process is sufficiently long and costly. We also indicate that the private firms' willingness to select merging with a SPAC instead of a traditional IPO depends strongly on the choices of the information acquisition strategies of underwriters and sponsors. Our comparative static results suggest that in a hotter market, SPAC acquisitions are more likely to occur than traditional IPOs in a typical situation in which underwriters acquire information but sponsors do not. However, if the traditional IPO process becomes substantially long and costly, these predictions may be modified.
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We explore the timing of the replacement of a manager as an important incentive mechanism, using a real options approach in a situation where the timing of the decision to replace the manager is related to a major change in a firm's... more
We explore the timing of the replacement of a manager as an important incentive mechanism, using a real options approach in a situation where the timing of the decision to replace the manager is related to a major change in a firm's strategies that involves spending large amounts of various sunk adjustment costs. In particular, we study this problem not only in a growing firm, but also in a declining firm under a continuous-time agency setting. We show that when renegotiation is not possible, the early replacement of the manager of a lower quality project (prior to the first-best trigger level) occurs only if a moral hazard problem exists. In addition, we indicate that the possibility of renegotiation drastically changes the results. The comparative static results with respect to the volatility of the business environment, the strength of the firm's governance and the competitiveness of the managerial labor market provide several empirical predictions related to executive compensation and turnover.
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Abstract We explore how the timings of compensation payments and contract terminations are jointly determined in a continuous-time principal–agent model under the discretionary termination policy of investors (the principal) when the... more
Abstract We explore how the timings of compensation payments and contract terminations are jointly determined in a continuous-time principal–agent model under the discretionary termination policy of investors (the principal) when the manager (agent) has loss–averse preferences. Our theoretical findings provide several new empirical implications for backloaded compensation and forced managerial turnover. Our model also shows that mandatory deferral regulation governing incentive pay induces investors to terminate the contract relation earlier and results in the more frequent replacement of managers.
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This paper examines whether or not production-based asset pricing model holds for the Japanese stock market over the period 1971–1991. This model characterizes an intertemporal marginal rate of substitution as a function of the return on... more
This paper examines whether or not production-based asset pricing model holds for the Japanese stock market over the period 1971–1991. This model characterizes an intertemporal marginal rate of substitution as a function of the return on physical investment. An implication of the model is that returns on investment inferred from investment data through a production function and an adjustment cost
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Exploiting dramatic changes in individual corporate behavior as well as macroeconomic environment for the period between 1982 and 2005, this paper empirically investigates the determinants of corporate cash holdings using the panel data... more
Exploiting dramatic changes in individual corporate behavior as well as macroeconomic environment for the period between 1982 and 2005, this paper empirically investigates the determinants of corporate cash holdings using the panel data of the companies listed at the three major stock exchanges. We find that like in Pinkowitz and Williamson (2001), the rent extraction by banks over industry firms promoted corporate cash holdings in the early 1980s. However, the weakened bank power was not responsible for a drastic decrease in the cash/asset ratio observed during the first half of the 1990s. Instead, the ratio declined as a consequence of the contraction of investment opportunities, the buildup of business credits as an alternative financial instrument, less needs for dividend payments, and higher costs of cash holdings.
This paper examines the effect of open access policy on competition in network industries under uncertainty. Comparing a competition under an open access policy with a facility-based competition, we confirm that allowing access to an... more
This paper examines the effect of open access policy on competition in network industries under uncertainty. Comparing a competition under an open access policy with a facility-based competition, we confirm that allowing access to an essential facility makes the timing of a follower's entry earlier than that in a facility-based competition, irrespective of the level of access charge. Furthermore, a leader's (i.e., an incumbent's) incentive for network investment under open access policy can be larger than without open access, depending on the relative magnitude between the level of access charge and positive network externality generated by an additional network facility.
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ABSTRACT Motivated by the debate on competition policies in public utility industries, this paper investigates firms’ incentives for investments in network public utility industries under competition and uncertainty. We employ a real... more
ABSTRACT Motivated by the debate on competition policies in public utility industries, this paper investigates firms’ incentives for investments in network public utility industries under competition and uncertainty. We employ a real options approach to examine the issues, since the industries are characterized by large sunk costs for investment and increasing demand (or cost) uncertainty.
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Research Interests:
ABSTRACT A continuous-time agency model is explored where the agent has loss-aversion preferences. Regardless of whether the reference point is formulated exogenously or endogenously, we show that the optimal contract includes a part that... more
ABSTRACT A continuous-time agency model is explored where the agent has loss-aversion preferences. Regardless of whether the reference point is formulated exogenously or endogenously, we show that the optimal contract includes a part that is less sensitive to the agent's continuation payoff; however, this part is preceded and followed by a range of option-type payoffs. Furthermore, the introduction of loss aversion induces investors to reward the agent earlier, and to use a higher-powered incentive scheme. Implementing the optimal contract through a combination of equity, long-term debt, and a line of credit, we provide possible explanations for the evolution of CEO compensation with a low level of stability of CEOs' equity ownership in the United States, and for corporate dividend-smoothing policy.
This paper examines firms' incentive to make irreversible investments under an open access policy with stochastically growing demand. Using a simple model, we derive an access-to-bypass equilibrium. Analysis of the equilibrium... more
This paper examines firms' incentive to make irreversible investments under an open access policy with stochastically growing demand. Using a simple model, we derive an access-to-bypass equilibrium. Analysis of the equilibrium confirms that the introduction of competition in network industries makes a firm's incentive to make investments greater than those of a monopolist. We then show that a change in access charges induces a trade-off in social welfare. That is, a decrease in the access charge expands a social benefit flow in the access duopoly, and deters not only the introduction of a new network facility, but also a positive network externality generated by the construction of an additional bypass network. The feasibility of the socially optimal investment timing is then discussed
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ABSTRACT We explore a continuous-time agency model with double moral hazard. Using a venture capitalist (VC)–entrepreneur relationship where the VC both supplies costly effort and chooses the optimal timing of the initial public offering... more
ABSTRACT We explore a continuous-time agency model with double moral hazard. Using a venture capitalist (VC)–entrepreneur relationship where the VC both supplies costly effort and chooses the optimal timing of the initial public offering (IPO), we show that optimal IPO timing is earlier under double moral hazard than under single moral hazard. Our results also indicate that the manager's compensation tends to be paid earlier under double moral hazard. We derive several comparative static results, notably that IPO timing is earlier when the need for monitoring by the VC is smaller and when the volatility of cash flows is larger.