Abstract: This paper presents a unified framework for analyzing the holdout problem, a pervasive economic phenomenon in which value creation is hindered by the incentive to free-ride on other agents' participation. My framework nests many classic applications, such as takeover and debt restructuring, and highlights the role of the commitment to the proposed offer: The problem can be resolved through contingent contracts, e.g., by a unanimity rule, provided that the principal is committed. In contrast, lack of commitment can substantially alter optimal offers depending on the payoff sensitivities of the existing contracts, which explains the absence of the unanimity rule despite its efficacy and cross-sectional heterogeneity in exchange offers. (E.g., senior debt used in debt restructuring but not in takeovers.) Furthermore, I investigate the impact of commitment and reveal that stronger commitment could backfire via renegotiation, exacerbating the holdout problem. This non-monotonicity reconciles contradictory empirical findings on the use of CACs in the sovereign debt market and sheds light on various policies. Lastly, the paper shows stronger investor protection could facilitate instead of hinder restructuring under limited commitment.
Abstract: We study how a representative sample of the U.S. population evaluates the morality of a broad range of corporate actions. The corporate actions we consider include decisions recently emphasized in relation to environmental, social, and governance (ESG) concerns, as well as other classic textbook decisions related to maximizing firm value. Our core findings are that: (i) all corporate actions we consider are perceived to be not just financial but also moral issues; (ii) many classic finance textbook issues, such as CEO pay, value-enhancing layoffs, wage reductions, legal corporate tax avoidance, and outsourcing decisions, are perceived to be significantly more of a moral issue than the ESG components emphasized in current executive pay contracts (e.g., renewable energy usage and workforce diversity); (iii) participants trade off moral concerns against monetary costs; (iv) shareholders have a greater willingness to pay for morally desirable corporate actions than customers or employees. Although we observe significant and plausible heterogeneity across participants in the absolute importance given to moral considerations, the relative ranking of the morality of different corporate actions is surprisingly stable across participants. Our results have broad implications for theoretical and empirical work in financial economics, as well as for finance practitioners.
Abstract: We construct an overlapping generations model of financial advisors, who have ethics, are hired competitively, interact with strategic investment funds, and are regulated. Misconduct is the outcome of the tension between the endogenous career concerns created by a competitive labour market rewarding good advisor behaviour and the strategic fund which can frustrate clients' inference through advisor incentives. We characterise market conditions leading to high misconduct. We offer a prediction as to the pattern of misconduct as wealth inequality increases. And we establish when, over the course of a career, financial advisors are most trustworthy.
Discussant: Andrey Ordin, University of Texas-Austin
