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Agency conflicts in financial contracting with applications to venture capital and CDO markets

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dc.contributor.advisor Stewart C. Myers. en_US Garrison, Kedran en_US
dc.contributor.other Massachusetts Institute of Technology. Dept. of Economics. en_US 2007-08-03T15:35:59Z 2007-08-03T15:35:59Z 2005 en_US 2005 en_US
dc.identifier.uri en_US
dc.description Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2005. en_US
dc.description Includes bibliographical references. en_US
dc.description.abstract In these papers I examine efficient financial contracting when incentive problems play a significant role. In the first chapter (joint with Z. Fluck and S. Myers) we focus on the venture capital industry. We build a two-stage model capturing moral hazard, effort provision, and hold-up problems between entrepreneurs and investors. Across multiple financing scenarios we solve numerically for optimal decision policies and NPV, finding significant value losses from first-best. A commitment to competitive syndicate financing increases effort and NPV and benefits all parties. However, syndicate financing raises potential information problems, and the fixed-fraction participation rule of Admati-Pfleiderer (1994) fails with endogenous effort. We find that debt financing is often less efficient than equity financing, for while it improves effort incentives it worsens hold-up and debt overhang problems in later-stage financing. In the next chapter I turn to the collateralized debt obligation or "CDO" market. CDOs are closed-end, actively-managed, highly leveraged bond funds whose managers typically receive subordinated compensation packages. I develop a model of manager trading behavior and quantify under-investment and asset substitution problems, calibrating to market parameters. en_US
dc.description.abstract (cont.) Compared to prior studies, I find similar value losses to senior investors and significantly higher increases in debt default risk and spread costs. However, for even extremely conservative effort assumptions, the ex-ante benefit of greater effort incentives outweighs risk-shifting costs, rationalizing observed contracts. I also analyze the ability of various payout policies and trading covenants to curtail risk-shifting. Excess interest diversions, contingent trading limits, and coverage test "haircuts" of lower-priced assets are effective measures and increase allowable leverage and equity returns. In the final chapter I examine the empirical relationship between CDO trading, manager compensation, and fund performance from 2001-2004. Using a large panel data set, I find a statistically significant relationship between trades which add volatility to the portfolio and the level of subordinated manager compensation. Worse deal performance increases risk-shifting behavior so long as subordinate investors are still in-the-money. Tendencies to group trades and the effect of managerial reputation are also considered. en_US
dc.description.statementofresponsibility by Kedran R. Garrison. en_US
dc.format.extent 207 p. en_US
dc.language.iso eng en_US
dc.publisher Massachusetts Institute of Technology en_US
dc.rights M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission. en_US
dc.rights.uri en_US
dc.subject Economics. en_US
dc.title Agency conflicts in financial contracting with applications to venture capital and CDO markets en_US
dc.type Thesis en_US Ph.D. en_US
dc.contributor.department Massachusetts Institute of Technology. Dept. of Economics. en_US
dc.identifier.oclc 65199808 en_US

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