In this paper we develop a contingent valuation model for zero-coupon bonds with default. In order to emphasize the role of maturity time and place of the lender's claim in the hierarchy of debt of a Þrm, we consider a Þrm that issues two bonds with different maturities and different seniorage. The model allows us to analyze the implications of both debt renegotiation and capital structure of a Þrm on the prices of bonds. We obtain that renegotiation brings about a signiÞcant change in the bond prices and that the effect is dispersed through different channels: increasing the value of the Þrm, reallocating payments, and avoiding costly liquidation. Moreover, the presence of two creditors leads to qualitatively different implications for pricing, while emphasizing the importance of bond covenants and renegotiation of the entire debt.
In this paper I analyze how corporate governance affects the performance of financial markets. I model the interaction between a firm's manager and its shareholders, and highlight the role played by the dividend report in information revelation and information transmission. The model shows that corporate governance mechanisms affect the market liquidity of the firm's stock (high monitoring costs and low ownership concentration lead to high market liquidity). Moreover, the effect of governance provisions that are aimed to improve financial transparency depends on the other corporate governance characteristics of the firm. Thus, disclosure of information by management associated with poor governance mechanisms may lead to an increase in the uncertainty about the liquidation value of the firm and therefore to a decrease in market liquidity.
In this paper I explore some of the consequences of greater market transparency for market performance in the presence of a strategic specialist. Although numerous studies have dealt with this issue, previous work has only considered either fully transparent or fully opaque markets. My model allows for different levels of transparency, and therefore sheds light on how transparency affects market performance. I show that an intermediate level of transparency can improve market performance relative to the more extreme cases of full transparency or no transparency at all.
If there are diseconomies of scale in asset management, any predictability in mutual fund performance will be arbitraged away by rational investors seeking funds with the highest expected performance (Berk and Green, 2004). In contrast, the performance of US equity mutual funds persists through time. In this paper, we report evidence that persistence is less prevalent among hard-to-find funds and investigate whether market frictions can reconcile the assumptions of investor rationality and diseconomies of scale with the empirical evidence. In particular, we extend the setting of Berk and Green (2004) to include entry costs and account for investor heterogeneity in financial sophistication, which we model as differences in reservation returns and the degree of financial constrainedness across investors. We show that for low levels of managerial skill, more visible funds, which are available to a broad set of investors, underperform less visible funds, which are only available to the most sophisticated investors. As managerial skill rises, funds with less sophisticated investors can outperform funds with more sophisticated investors, as a consequence of the interaction of entry costs with financial constraints. Therefore, for a range of managerial skill, hard-to-find funds exhibit less dispersion in equilibrium expected performance. Using data on US equity mutual funds in the 1996-2010 period and different proxies for fund visibility, we find empirical evidence that differences in observed performance are significantly less persistent among hard-to-find funds than otherwise similar funds.JEL codes: G2; G23.
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