Academic Commons Search Results
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Academic Commons Search Resultsen-usEarnings Manipulation and Asset Substitution: Real Effects of Financial Reporting Scrutiny on Debt Contracting
http://academiccommons.columbia.edu/catalog/ac:201042
Han, Dong Joonhttp://dx.doi.org/10.7916/D8H13257Wed, 13 Jul 2016 18:21:23 +0000This paper studies the impact of financial reporting scrutiny on (private) debt contracting in the presence of two capital market frictions: a cash-diversion problem and an asset-substitution problem. When cash flow realizations are not verifiable, firms have an incentive to divert cash by manipulating their accounting reports. When firms' project choices are not verifiable, post financing, they may have an incentive to choose riskier projects than desired by their financiers. While earlier work has mostly examined these two frictions independently, they are intricately linked: to address the cash-diversion problem, an optimal contract resembles a debt contract, which in turn causes the asset-substitution problem. Holding the scrutiny of financial reporting fixed, I show that the emergence of the asset-substitution problem, instead of compounding the existing inefficiencies from the cash-diversion problem, may lead to improved investment efficiency and more socially efficient risk-taking. On the other hand, increased reporting scrutiny may undermine investment efficiency (i.e., decrease banks' lending) and adversely affect firms' risk shifting from a social welfare perspective.Accounting, Finance, Economic theorydh2415BusinessDissertationsEssays on Financial Crisis and Bailout
http://academiccommons.columbia.edu/catalog/ac:186932
Rhee, Keeyounghttp://dx.doi.org/10.7916/D8G44P84Fri, 24 Apr 2015 18:34:30 +0000This dissertation consists of three essays on financial economics. In the first chapter, jointly written with Yeon-Koo Che and Chongwoo Choe, we focus on observations during the recent financial crisis that financially distressed firms may be reluctant to accept government bailouts for fear that it may signal the weakness of their balance sheets and inhibit future financing. To capture such bailout stigma, we develop a dynamic model in which a firm must finance projects by selling legacy assets. The value of the asset is the firm's private information, which results in inefficient trading of the asset due to standard adverse selection. Although the adverse selection problem creates a scope for government intervention, accepting a bailout can signal the toxicity of the asset, which worsens the adverse selection for the firm in the subsequent trading of its asset. We find multiple equilibrium responses to a government bailout. Bailout terms that would otherwise be acceptable may be refused due to the stigma. Even terms that are so generous as to be acceptable for firms with non-toxic assets may result in low take-up; nevertheless, such a policy could be beneficial indirectly by allowing a firm to improve its market perception by refusing the bailout. Bailout that leads to immediate market rejuvenation is welfare-dominated by an equilibrium without such market rejuvenation. We further explore an optimal design of a bailout program both in offer terms and formats and show that a secret bailout that conceals the identity of its recipient can mitigate the stigma and can implement the (constrained) efficient outcome.
The second chapter is motivated by a situation in which when a firm is financially distressed, it is uncertain whether the distress stems from an unfolding economic crisis or excessive risk-taking by the firm. I analyze how these uncertainties as well as a government's desire to control future moral hazard influence a bailout decision. To this end, I develop a two-period model in which the government privately receives a signal on the unknown state of the economy. In this model, bailing out a distressed firm influences the belief about the state held by another firm in the later period, yielding two conflicting effects. First, the bailout indicates an increased chance that the economy is in crisis, which discourages the later firm from risk taking. Second, it signifies an increased likelihood of future bailout, which encourages risk taking. When the prior probability of crisis is low, the latter effect dominates. Hence, the government takes a tougher stance, bailing out less frequently than it would without the long-term consideration. When the prior probability of crisis is high, the former effect dominates. Therefore, the government takes an alarmist stance, bailing out more frequently than it would without the long-term consideration.
The third chapter analyzes how the government's strategic disclosure of its superior information on an aggregate uncertainty influences risk taking by a firm. The government is often tempted to strategically disclose its superior knowledge to influence management of financial risk by a firm. To capture this, I develop a static model in which the government with private information sends a cheap-talk message to the firm before assuming its risk taking. The private signal determines the government's inclination to bailout of a distressed firm because it is used to assess the source of this financial distress. If the private signal increases the government's inclination to bailout, the government may have an incentive to lie and send the opposite message, thereby preserving market discipline. However, the firm rationally infers this strategic disclosure, and therefore, may assume excessive risk taking no matter what messages does it receive from the government. Consequently, an informative equilibrium may worsen moral hazard compared to the babbling equilibrium.Economic theory, FinanceEconomicsDissertationsCompetitive Nonlinear Taxation and Constitutional Choice
http://academiccommons.columbia.edu/catalog/ac:141997
Morelli, Massimo; Yang, Huanxing; Ye, Lixinhttp://hdl.handle.net/10022/AC:P:11832Wed, 23 Nov 2011 00:00:00 +0000In an economy where agents have different productivities and mobility, we compare a unified nonlinear optimal taxation with the equilibrium taxation that would be chosen by two competing tax authorities if the same economy were divided into two States. The overall level of progressivity and redistribution is unambiguously lower under competitive taxation; the "rich" are always in favor of competing authorities, whereas the "poor" are always in favor of unified taxation; the preferences of the middle class depend on the initial conditions in terms of the distribution of abilities, the relative power of the various classes, and mobility costs.Finance, Economic theorymm3331Political ScienceArticlesRisk Premia and Optimal Liquidation of Defaultable Securities
http://academiccommons.columbia.edu/catalog/ac:139526
Leung, Siu Tang; Liu, Penghttp://hdl.handle.net/10022/AC:P:11331Mon, 03 Oct 2011 00:00:00 +0000This paper studies the optimal timing to liquidate defaultable securities in a general intensity-based credit risk model under stochastic interest rate. We incorporate the potential price discrepancy between the market and investors, which is characterized by risk-neutral valuation under different default risk premia specifications. To quantify the value of optimally timing to sell, we introduce the delayed liquidation premium which is closely related to the stochastic bracket between the market price and a pricing kernel. We analyze the optimal liquidation policy for various credit derivatives. Our model serves as the building block for the sequential buying and selling problem. We also discuss the extensions to a jump-diffusion default intensity model as well as a defaultable equity model.Finance, Economic theorytl2497Industrial Engineering and Operations ResearchArticlesAccounting for Risk Aversion in Derivatives Purchase Timing
http://academiccommons.columbia.edu/catalog/ac:138783
Leung, Siu Tang; Ludkovski, Mikehttp://hdl.handle.net/10022/AC:P:11191Fri, 16 Sep 2011 00:00:00 +0000We study the problem of optimal timing to buy/sell derivatives by a risk-averse agent in incomplete markets. Adopting the exponential utility indifference valuation, we investigate this timing flexibility and the associated delayed purchase premium. This leads to a stochastic control and optimal stopping problem that combines the observed market price dynamics and the agent's risk preferences. Our results extend recent work on indifference valuation of American options, as well as the authors' first paper (Leung and Ludkovski, SIAM J. Fin. Math., 2011). In the case of Markovian models of contracts on non-traded assets, we provide analytical characterizations and numerical studies of the optimal purchase strategies, with applications to both equity and credit derivatives.Finance, Economic theorytl2497Industrial Engineering and Operations ResearchArticlesDoes a "two-pillar Phillips curve" justify a two-pillar monetary policy strategy?
http://academiccommons.columbia.edu/catalog/ac:114752
Woodford, Michaelhttp://hdl.handle.net/10022/AC:P:442Mon, 28 Mar 2011 00:00:00 +0000Arguments for a prominent role for attention to the growth rate of monetary aggregates in the conduct of monetary policy are often based on references to low-frequency reduced-form relationships between money growth and inflation. The "two-pillar Phillips curve" proposed by Gerlach (2004) has recently attracted a great deal of interest in the euro area, where it is sometimes supposed to provide empirical support for the wisdom of a "two-pillar strategy" that uses distinct analytical frameworks to assess shorter-run and longer-run risks to price stability. I show, however, that regression coefficients of the kind reported by Assenmacher-Wesche and Gerlach (2006a) among others are quite consistent with a "new Keynesian" model of inflation determination, in which the quantity of money plays no role in inflation determination, at either high or low frequencies. I also show that empirical results of this kind do not in themselves establish that money growth must be useful in forecasting inflation, either in the short run or over a longer run. Hence they provide little support for the ECB's monetary "pillar."Economic theory, Financemw2230EconomicsWorking papersOn the Sources of the Inflationary Bias
http://academiccommons.columbia.edu/catalog/ac:100477
Piga, Gustavohttp://hdl.handle.net/10022/AC:P:15728Thu, 03 Mar 2011 00:00:00 +0000Why do dynamic inconsistencies in monetary policy exist? In this paper we present a traditional model with output inefficiencies, but we allow for monetary policy to be influenced by the various constituencies in the economy, that pressure the Congress to in turn pressure the central bank to adopt a particular policy stance. We show that in this economy an inflationary-bias arises due to the lobbying pressure of outsiders. Furthermore, we show that if lobbying pressures are high enough, an inflationary-bias cannot be avoided for any finite level of central bank independence. We also show that introducing the realistic feature of lobbying pressures has an impact on the stabilization properties of monetary policy. When a supply shock occurs, the shock is totally absorbed by a forward-looking trade-union which has no costs of lobbying, independently of any finite degree of conservativeness and independence of the central banker, who has to accept an extreme increase in price instability. We show that monetary policy delegation is therefore sub-optimal in achieving price-stability compared to labor-market reforms meant to remove monopolistic elements. However, the same structural policies will induce greater output instability by strengthening the power of conservative central bankers.Economic theory, Financegp19EconomicsWorking papersThe Central-Bank Balance Sheet as an Instrument of Monetary Policy
http://academiccommons.columbia.edu/catalog/ac:128364
Cúrdia, Vasco; Woodford, Michaelhttp://hdl.handle.net/10022/AC:P:9468Thu, 19 Aug 2010 00:00:00 +0000While many analyses of monetary policy consider only a target for a short-term nominal interest rate, other dimensions of policy have recently been of greater importance: changes in the supply of bank reserves, changes in the assets acquired by central banks, and changes in the interest rate paid on reserves. We extend a standard New Keynesian model to allow a role for the central bank's balance sheet in equilibrium determination, and consider the connections between these alternative dimensions of policy and traditional interest-rate policy. We distinguish between "quantitative easing" in the strict sense and targeted asset purchases by a central bank, and argue that while the former is likely be ineffective at all times, the latter dimension of policy can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest-rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves; in our model, this requires that the interest rate on reserves be kept near the target for the policy rate at all times.Economic theory, Financemw2230EconomicsWorking papersConventional and Unconventional Monetary Policy
http://academiccommons.columbia.edu/catalog/ac:127324
Cúrdia, Vasco; Woodford, Michaelhttp://hdl.handle.net/10022/AC:P:9189Tue, 06 Jul 2010 00:00:00 +0000We extend a standard New Keynesian model to incorporate heterogeneity in spending opportunities and two sources of (potentially time-varying) credit spreads, and to allow a role for the central bank's balance sheet in equilibrium determination. We use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions, and to consider additional dimensions of central-bank policy—variations in the size and composition of the central bank's balance sheet, and payment of interest on reserves—alongside the traditional question of the proper choice of an operating target for an overnight policy rate. We also give particular attention to the special problems that arise when the zero lower bound for the policy rate is reached. We show that it is possible to provide criteria for the choice of policy along each of these possible dimensions, within a single unified framework, and to provide policy prescriptions that apply equally when financial markets work efficiently and when they are subject to substantial disruptions, and equally when the zero bound is reached and when it is not a concern.Economic theory, Financemw2230EconomicsWorking papersOptimal Monetary Stabilization Policy
http://academiccommons.columbia.edu/catalog/ac:127327
Woodford, Michaelhttp://hdl.handle.net/10022/AC:P:9190Tue, 06 Jul 2010 00:00:00 +0000This chapter reviews the theory of optimal monetary stabilization policy in New Keynesian models, with particular emphasis on developments since the treatment of this topic in Woodford (2003). The primary emphasis of the chapter is on methods of analysis that are useful in this area, rather than on final conclusions about the ideal conduct of policy (that are obviously model-dependent, and hence dependent on the stand that one might take on many issues that remain controversial), and on general themes that have been found to be important under a range of possible model specifications. With regard to methodology, some of the central themes of this review will be the application of the method of Ramsey policy analysis to the problem of the optimal conduct of monetary policy, and the connection that can be established between utility maximization and linear-quadratic policy problems of the sort often considered in the central banking literature. With regard to the structure of a desirable decision framework for monetary policy deliberations, some of the central themes will be the importance of commitment for a superior stabilization outcome, and more generally, the importance of advance signals about the future conduct of policy; the advantages of history-dependent policies over purely forward-looking approaches; and the usefulness of a target criterion as a way of characterizing a central bank's policy commitment.Economic theory, Financemw2230EconomicsWorking papersCredit Spreads and Monetary Policy
http://academiccommons.columbia.edu/catalog/ac:124354
Cúrdia, Vasco; Woodford, Michaelhttp://hdl.handle.net/10022/AC:P:8347Wed, 20 Jan 2010 00:00:00 +0000We consider the desirability of modifying a standard Taylor rule for a central bank's interest-rate policy to incorporate either an adjustment for changes in interest-rate spreads (as proposed by Taylor, 2008, and by McCulley and Toloui, 2008) or a response to variations in the aggregate volume of credit (as proposed by Christiano et al., 2007). We consider the consequences of such adjustments for the way in which policy would respond to a variety of types of possible economic disturbances, including (but not limited to) disturbances originating in the financial sector that increase equilibrium spreads and contract the supply of credit. We conduct our analysis using the simple DSGE model with credit frictions developed in Cúrdia and Woodford (2009), and compare the equilibrium responses to a variety of disturbances under the modified Taylor rules to those under a policy that would maximize average expected utility. According to our model, a spread adjustment can improve upon the standard Taylor rule, but the optimal size is unlikely to be as large as the one proposed, and the same type of adjustment is not desirable regardless of the source of the variation in credit spreads. A response to credit is less likely to be helpful, and the desirable size (and even sign) of response to credit is less robust to alternative assumptions about the nature and persistence of the disturbances to the economy.Economic theory, Financemw2230EconomicsWorking papersCredit Frictions and Optimal Monetary Policy
http://academiccommons.columbia.edu/catalog/ac:124306
Cúrdia, Vasco; Woodford, Michaelhttp://hdl.handle.net/10022/AC:P:8332Tue, 19 Jan 2010 00:00:00 +0000We extend the basic (representative-household) New Keynesian (NK) model of the monetary transmission mechanism to allow for a spread between the interest rate available to savers and borrowers, that can vary for either exogenous or endogenous reasons. We find that the mere existence of a positive average spread makes little quantitative difference for the predicted effects of particular policies. Variation in spreads over time is of greater significance, with consequences both for the equilibrium relation between the policy rate and aggregate expenditure and for the relation between real activity and inflation. Nonetheless, we find that the target criterion -- a linear relation that should be maintained between the inflation rate and changes in the output gap -- that characterizes optimal policy in the basic NK model continues to provide a good approximation to optimal policy, even in the presence of variations in credit spreads. We also consider a "spread-adjusted Taylor rule," in which the intercept of the Taylor rule is adjusted in proportion to changes in credit spreads. We show that while such an adjustment can improve upon an unadjusted Taylor rule, the optimal degree of adjustment is less than 100 percent; and even with the correct size of adjustment, such a rule of thumb remains inferior to the targeting rule.Economic theory, Financemw2230EconomicsWorking papers