Essays in macroeconomics, corporate finance, and social learning

Abstract

(cont.) the release of information until the long-term results of the firm are realized. In equilibrium, when the belief about the aggregate state is high, managers will be given short-term incentives, delaying the release of information. When the belief about the aggregate state is low, long-term incentives will be prevalent and information will be released without delay. This produces asymmetric learning dynamics for the economy, with gradual booms and rapid recessions. In a boom the belief about the aggregate state increases, information is pushed off into the future, and learning is slow. In a recession the belief is falling, triggering a switch to long-term incentives, that brings forward the release of information and accelerates learning. Chapter 2 presents a model of corporate misreporting in an environment where investors have heterogeneous beliefs and short sale constraints. The disagreement between investors provides a motive for agents who start a firm to limit the amount of information which it releases to the public so as to sponsor speculation over its value. This incentive to limit information is stronger when the heterogeneity of beliefs among investors is stronger. Investors also learn about a firm's expected profitability from the information released by other firms in the industry. I show that this creates a strategic complementarily in the precision of information released by each firm. This can give rise to multiple equilibria: one in which all firms release precise reports and one in which their reports are inaccurate ...

This thesis consists of three essays at the intersection of macroeconomics, corporate finance, and social learning. The underlying theme which links these three chapters is the study of private incentives to gather and release information and their impact upon the way society learns as a whole. Chapters 1 and 2 focus upon the incentives within a firm to distort the way a firm's performance is perceived publicly. Chapter 1 focuses upon the case of a manager whose incentives encourage her to take actions which distort the observed performance of the firm. In that context the firm's owners tolerate distortions so as to gain from high powered incentives. In chapter 2 I argue that the owners of a firm may have it in their interest to distort the information a firm releases so as to create uncertainty and thereby sponsor speculation on the value of the firm. Chapter 3 considers a scenario where an intelligence agency relies upon the information provided by citizens not under their direct control. A common feature of each chapter is that private decisions about information release are made without considering their full social value. Turning to specifics, Chapter 1 presents a theory of gradual booms and rapid recessions that is motivated by the experience of the US economy over the last decade. The dynamics of the economy are driven by the speed at which agents learn about the unobserved aggregate state. Agents learn from the observed performance of firms. Each firm is controlled by a manager whose compensation is based upon the observed performance of their firm. If a manager is given short-term incentives, she will try to hide weak short-term performance. This makes the short-term performance of a firm less informative for the aggregate state, delaying