Security Design under Common-Value Competition [SSRN] [slides]
Revise and Resubmit, Econometrica
Best Paper in Finance Theory on the Job Market awarded by FTG, 2021
WFA PhD Candidate Award for Outstanding Research, 2021
Abstract: This paper studies bidders' security design when they compete for a common-value investment opportunity under dispersed information. Out of a wide range of securities, bidders offer debt financing, the security family with the lowest information sensitivity. If the entrepreneur has superior information, bidders choose debt because a debt offer wins more often when the project quality is higher. If the entrepreneur is uninformed, bidders' choice of debt is driven by the presence of informed competitors. First, the entrepreneur can infer about the project quality from bidders' offers, and a debt offer wins more often when the entrepreneur's belief is better. Second, a debt offer better protects a bidder against the winner's curse. The results are in stark contrast to security design by a monopolistic agent, as well as to DeMarzo, Kremer, and Skrzypacz (2005)'s result under private-value competition.
Presentations: Five Star Workshop, NYU Shanghai, FTG Fall Meeting, OxFIT, University of Rochester, EEA-ESEM, CMES, AMES, WFA, Barcelona GSE Summer Forum, City University of Hong Kong, UCL, New Economic School, Frankfurt School of Finance and Management, SAIF, HEC Lausanne, Copenhagen Business School, University of Mannheim, Tsinghua PBCSF, Chinese University of Hong Kong, University of Washington Foster, University of Amsterdam, Tsinghua SEM, EEA-ESWM, Corporate Finance Day, LSE
Share Issues versus Share Repurchases, with Philip Bond and Hongda Zhong [SSRN] [slides]
Abstract: Almost all firms repurchase shares through open market repurchase (OMR) programs. In contrast, issue methods are more diverse: both at-the-market offerings, analogous to OMR programs, and SEOs, analogous to the rarely-used tender-offer repurchases are used by significant fractions of firms. Moreover, average SEOs are larger than at-the-market offerings. We show that this asymmetry in the diversity of transaction methods in issuances and repurchases and the size-method relation in issuances are natural consequences of the single informational friction of a firm having superior information to investors. Finally, repurchasing firms are likely maximizing long-term shareholders' payoffs rather than boosting short-term share prices.
Presentations: Renmin University of China, AFA, SFS Cavalcade Asia-Pacific, University of Rochester*, Corporate Finance Day*, EFA, BSE Summer Forum, FTG Summer Meeting, Esade Spring Workshop, Tsinghua PBCSF, SGF Conference, CICF, LSE
Security Design under Two-Sided Asymmetric Information [slides]
Abstract: This paper studies a model in which a firm organizes a security-bid auction when both the firm and investors have private information. Two-sided asymmetric information is novel to the literature, which has been focused on one-sided private information. The firm aims at both signaling high valuation to investors and intensifying competition among investors to reduce their informational rent. In equilibrium, all types of the firm pool on requiring payments in the most information-sensitive security family.
Presentations: FIRS, EEA-ESWM