Publications
43 results found
Hennessy C, Chemla G, 2022, Signaling, instrumentation, and CFO decision-making, Journal of Financial Economics, Vol: 144, Pages: 849-863, ISSN: 0304-405X
Building parable economies embedding econometricians, we view alternative estimators (IV, fuzzy RD, natural experiments, OLS, event studies) from the perspective of privately-informed decision-makers, e.g., CFOs. IV estimates can be misleading since randomization through observable instruments eliminates signal content arising from discretion. If the goal is informing discretionary decisions, rather than predicting out-comes after forced/mistaken actions, instrumentation is problematic, whereas OLS or event studies can be sufficient. The analysis shows the utility of alternative estimators hinges upon oft-neglected assumptions about agent/econometrician information sets, as distinct from exclusion restrictions. We recommend parable economy estimation as precursor to real-world IV estimation.
Chemla G, Tinn K, 2021, How wise are crowds on crowdfunding platforms?, The Palgrave Handbook of Technological Finance, Editors: Rau, Waldrop, Zingales, Pages: 397-406, ISBN: 978-3-030-65116-9
While firms have obtained outside financing from large numbers of investors on financialmarkets for centuries, online crowdfunding platforms have only emerged as a major sourceof funding for start-ups and new projects for a decade. The information available to backerson crowdfunding platforms is generally coarse. This paper surveys the existing literature on theextent to which crowdfunding harnesses the wisdom of crowds. We discuss two broad categories ofcrowdfunding. Reward-based crowdfunding platforms such as Kickstarter, where backers typicallyhave private and independent valuations, appear to offer environments that may harness thewisdom of crowds. In contrast, initial coin offerings (ICOs) offering services with networkexternalities and security-based platforms with common values appear to exhibit some resultseliciting valuable information, but several results appear to point to informational cascades.
Chemla G, Hennessy C, 2021, Equilibrium counterfactuals, International Economic Review, Vol: 62, Pages: 639-669, ISSN: 0020-6598
We incorporate structural modellers into the economy they model. Using traditional moment-matching, they treat policy changes as zero probability (or exogenous) ”counterfactuals.” Bias occurs since real-world agents understand policy changes are positive probability events guided by modellers. Downward, upward, or sign bias occurs. Bias is illustrated by calibrating the Leland model to the 2017 tax cut. The traditional identifying assumption, constant moment partial derivative sign, is incorrect with policy optimization. The correct assumption is constant moment total derivative sign accounting for estimation-policy feedback. Model agent expectations can be updated iteratively until policy advice converges to agent expectations, with bias vanishing.
Chemla G, Hennessy C, 2020, Rational expectations and the paradox of policy-relevant natural experiments, Journal of Monetary Economics, Vol: 114, Pages: 368-381, ISSN: 0304-3932
Policy experiments using large microeconomic datasets have recently gained ground in macro- economics. Imposing rational expectations, we examine robustness of evidence derived from ideal natural experiments applied to atomistic agents in dynamic settings. Paradoxically, once experi-mental evidence is viewed as su¢ ciently clean to use, it then becomes contaminated byex post endo- geneity: Measured responses depend upon priors and the objective function into which evidence is fed. Moreover, agentsípolicy beliefs become endogenously correlated with their causal parameters, severely clouding inference, e.g. sign reversals and non-invertibility may obtain. Treatment-control di§erences are contaminated for non-quadratic adjustment costs. Constructively, we illustrate how inference can be corrected accounting for feedback and highlight factors mitigating contamination.
Chemla G, Tinn K, 2020, Learning through Crowdfunding, Management Science, Vol: 66, Pages: 1783-1801, ISSN: 0025-1909
We develop a model where reward-based crowdfunding enables Örms to obtain a reliableproof of concept early in their production cycle: they learn about total demand from a limitedsample of target consumers pre-ordering a new product. Learning from the crowdfunding samplecreates a valuable real option as Örms invest only if updated expectations about total demandis su¢ ciently high. This is particularly valuable for Örms facing a high degree of uncertaintyabout consumer preferences, such as developers of innovative consumer products. Learning alsoenables Örms to overcome moral hazard. The higher the funds raised, the lower the Örmsíincentives to divert them, provided third-party platforms limit the sample size by restrictingcampaign length. While the probability of campaign success decreases with sample size, theexpected funds raised are maximized at an intermediate sample size. Our results are consistentwith stylized facts and lead to new empirical implications.
Chemla G, Christopher Hennessy, 2019, Controls, belief updating, and bias in medical RCTs, Journal of Economic Theory, Vol: 184, ISSN: 0022-0531
We develop a formal model of placebo e§ects. If subjects in seemingly-ideal single-stage RCTsupdate beliefs about breakthroughs based upon personal physiological responses, mental e§ectsdi§er across medications received, treatment versus control. Consequently, the average cross-arm health di§erence becomes a biased estimator. Constructively, we show: bias can be alteredthrough choice of control; higher-e¢ cacy controls mitigate upward bias; and e¢ cacy states canbe revealed through controls of intermediate e¢ cacy or controls that mimic a subset of e¢ cacystates. Consistent with experimental evidence, our theory implies outcomes within-arm andcross-arm di§erences can be non-monotone in treatment probability. Finally, we develop noveldi§erences-in-di§erences and triangle equality tests to detect RCT bias.
Chemla G, Tinn K, 2017, Learning Through Crowdfunding, SSRN Electronic Journal
We develop a model where reward-based crowdfunding enables firms to obtain a reliable proof of concept early in their production cycle. The information gathered from a subsample of backers through a fixed length pre-selling campaign enables firms to update their beliefs about the preferences of all future consumers. This creates a valuable real option as firms invest only if updated demand is high. Further, such updating mitigates moral hazard: the higher the funds raised, the lower the firms' incentives to divert them. Our results are consistent with stylized facts and provide new testable implications.
Chemla GH, Hennessy CA, 2016, Government as borrower of first resort, Journal of Monetary Economics, Vol: 84, Pages: 1-16, ISSN: 0304-3932
We examine optimal provision of riskless government bonds under asymmetric information andsafe asset scarcity. Paradoxically, corporations have incentives to issue junk debt precisely whenintrinsic demand for safe debt is high since uninformed investors then migrate to risky overheateddebt markets. Uninformed demand stimulates informed speculation which drives junk debt pricescloser to fundamentals, encouraging pooling at high leverage. Acting as borrower of Örst resort,the government can issue safe bonds which siphon o§ uninformed demand for risky corporatedebt and reduce socially wasteful informed speculation. Thus, government bonds either eliminatepooling at high leverage or improve risk sharing in such equilibria. The optimal quantity ofgovernment bonds is increasing in intrinsic demand for safe assets and non-monotonic in marginalQ.
Chemla G, Hennessy C, 2014, Skin in the game and moral hazard, The Journal of Finance, Vol: 69, Pages: 1597-1641, ISSN: 1540-6261
What determines securitization levels, and should they be regulated? To address these questions we develop a model where originators can exert unobservable effort to increase expected asset quality, subsequently having private information regarding quality when selling ABS to rational investors. Absent regulation, originators may signal positive information via junior retentions or commonly adopt low retentions if funding value and price informativeness are high. Effort incentives are below first-best absent regulation. Optimal regulation promoting originator effort entails a menu of junior retentions or one junior retention with size decreasing in price informativeness. Zero retentions and opacity are optimal amongst regulations inducing zero effort.
Chemla G, Hennessy C, 2011, Privately versus Publicly Optimal Skin in the Game: Optimal Mechanism and Security Design
We examine screening incentives, welfare and the case for mandatory skin-in-the-game. Ex ante banks can screen, using interim private information to choose retentions and structuring. Ex post speculators trade with rational hedging investors. Absent regulation, there is a separating equilibrium with voluntary retentions. If funding value is high, banks may instead originate-to-distribute (OTD), selling the entire asset in opaque form, deterring informed speculation and destroying screening incentives. Under weaker conditions, banks instead sell the asset in transparent form, using tranching to increase hedging demand, informed speculation and price informativeness. With sufficient informed speculation, transparent OTD actually creates stronger screening incentives than voluntary retentions. In all unregulated market equilibria, interim adverse selection reduces screening incentives, so mandated retentions potentially increase welfare. To induce screening via pooling, banks should be required to retain a uniform junior tranche size which decreases in informational efficiency. However, uniform retention mandates may not be optimal. To improve risk-sharing, screening can instead be induced via separating contracts by compelling banks to choose from a menu of junior tranche retention sizes. In either case, efficiency of risk-sharing is maximized by splitting marketed claims into safe senior and risky mezzanine tranches. Finally, the separating (pooling) regulatory regime generally leads to higher welfare if efficient risk-sharing (bank investment scale) is the dominant consideration, and is always optimal in informationally inefficient markets.
Chemla G, Hennessy C, 2011, Security Design: Signaling versus Speculative Markets
We determine optimal security design and retention of asset-backed securities by a privately informed issuer with positive NPV uses for immediate cash. In canonical models, investors revert to prior beliefs if issuers pool at zero-retentions (originate-to-distribute), and separating equilibria are welfare-dominated since separation entails signaling via asset-retention and underinvestment. However, we show speculative markets arise if and only if issuers pool, creating previously overlooked costs. Pooling induces socially costly information acquisition by speculators. Further, in pooling equilibria, issuers never sell safe claims, leaving uninformed investors exposed to adverse selection and distorting risk sharing. In such equilibria, issuers retain zero interest in the asset, and speculator effort is maximized by splitting cash flow into a risky senior ("debt") tranche and residual junior ("equity") claim. Optimal leverage trades off per-unit speculator gains against endogenous declines in uninformed debt trading. Issuer incentives to implement the pooling equilibrium, with distorted risk sharing, are strong precisely when efficient risk sharing, achieved through separation, has high social value. In such cases, a tax on issuer proceeds can raise welfare by encouraging issuer retentions. Taxation dominates mandatory skin-in-the-game as a policy response, since the latter creates gratuitous underinvestment.
Aid R, Chemla G, Porchet A, et al., 2011, Hedging and Vertical Integration in Electricity Markets, Management Science, Vol: 57, Pages: 1438-1452, ISSN: 0025-1909
Chemla G, Pop A, Pop D, 2010, Privatization and GovernanceRegulation in FrontierEmerging Markets: The Caseof Romania, Financial Institutions and Markets, Pages: 205-224
This chapter investigates the link between the regulation of controltransactions and the institutional and corporate features of public companies,by analyzing the massive delisting activity in the Romanian capitalmarket. The peculiar ownership reforms involving a large number oflisted companies offer a unique opportunity to verify Bebchuk and Roe’s(1999) theory of path dependence. Over time, the Romanian authoritieshave undertaken wide-ranging institutional reforms, most of which favorblockholders over small and dispersed shareholders. Our empirical approach,based on logit and duration models, allows us to analyze the evolution ofpublic companies over this period and sheds light on the likely events causingfrontier emerging markets’ eclipse. Our main findings reveal that delisting ismore likely to occur when (i) the shareholdings acquired from the privatizationauthority by circumventing the capital market are high; (ii) the companyexperiences frequent takeover bids; and (iii) the stock liquidity is low.
Pop D, Pop A, Chemla G, 2010, Financial Institutions and Markets The Financial Crisis: An Early Retrospective
We investigate the link between the regulation of control transactions and the institutional and corporatefeatures of public companies, by analyzing the massive delisting activity in the Romanian capital market. The peculiar ownership reforms involving a large number of listed companies offer a unique opportunity to test Bebchuk and Roe’s (2000) theory of path dependence. Over time, the Romanian authorities have undertaken wide-ranging institutional reforms, most of which favoring blockholders over small and dispersed shareholders. Our empirical approach, based on logit and duration models, allows us to analyze the evolution of public companies over this period and sheds light on the likely events causing the eclipse of frontier emerging markets. Our main findings reveal that delisting is more likely to occur when (i) the shareholdings acquired from the privatization authority by circumventing the capital market are high; (ii) the company experiences frequent takeover bids; and (iii) the stock liquidity is low.
Chemla G, Porchet A, Touzi N, et al., 2009, Forward Hedging and Vertical Integration in Electricity Markets.
This paper analyzes the interactions between vertical integration and (wholesale)spot, forward and retail markets in risk management. We develop an equilibriummodel that fits electricity markets well. We point out that vertical integration andforward hedging are two separate levers for demand and spot price risk diversification.We show that they are imperfect substitutes as to their impact on retail prices andagents’ utility because the asymmetry between upstream and downstream segments.While agents always use the forward market, vertical integration may not arise. Inaddition, in presence of highly risk averse downstream agents, vertical integration maybe a better way to diversify risk than spot, forward and retail mar kets. We illustrateour analysis with data from the French electricity market.
Chemla G, Winter R, 2009, Taxes and Corporate Dynamics: The Product-Market Effect.
De Bettignies J-E, Chemla G, 2008, Corporate Venturing, Allocation of Talent, and Competition for Star Managers
We provide new rationales for corporate venturing (CV), based on competition for talented managers. As returns to venturing increase, firms engage in CV for reasons other than capturing these returns. First, higher venturing returns increase managerial compensation, to which firms respond by increasing the power of incentives. Managers increase effort, prompting firms to reallocate them to new ventures, where the marginal product of effort is highest. Second, as returns to venturing become large, CV emerges as a way to recruit/retain managers who would otherwise choose alternative employment. We derive several testable empirical predictions about the determinants and structure of CV.
Bettignies J, Chemla G, 2007, Corporate venturing, allocation of talent, and competition for star managers, Management Science, Vol: 54, Pages: 505-521, ISSN: 1526-5501
We provide new rationales for corporate venturing, based on competition for talented managers. As returns to venturing increase, firms engage in corporate venturing for reasons other than capturing these returns. First, higher venturing returns increase managerial compensation, to which firms respond by increasing incentives. Managers increase effort, prompting firms to reallocate them to new ventures, where the marginal product of effort is highest. Second, as returns to venturing become large, corporate venturing emerges as a way to recruit/retain managers who would otherwise choose alternative employment. We derive several testable empirical predictions about the determinants and structure of corporate venturing.
Chemla G, Habib M, Ljungqvist, 2007, An analysis of shareholder agreements, Journal of the European Economic Association, Vol: 5, Pages: 93-121, ISSN: 1542-4766
Ljungqvist A, Habib MA, Chemla G, 2007, An Analysis of Shareholder Agreements.
Shareholder agreements govern the relations among shareholders in privately held firms, such as joint ventures and venture capital-backed companies. We provide an economic explanation for key clauses in such agreements—namely, put and call options, tag-along and drag-along rights, demand and piggy-back rights, and catch-up clauses. In a dynamic moral hazard setting, we show that these clauses can ensure that the contract parties make efficient ex ante investments in the firm. They do so by constraining renegotiation. In the absence of the clauses, ex ante investment would be distorted by unconstrained renegotiation aimed at (i) precluding value-destroying ex post transfers, (ii) inducing value-increasing ex post investments, or (iii) precluding hold-out on value-increasing sales to a trade buyer or the IPO market.
Chemla G, 2005, Hold-up, stakeholders and takeover threats, JOURNAL OF FINANCIAL INTERMEDIATION, Vol: 14, Pages: 376-397, ISSN: 1042-9573
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Chemla G, 2004, Takeovers and the dynamics of information flows, International Journal of Industrial Organization, Vol: 22, Pages: 575-16 pages, ISSN: 0167-7187
Chemla G, 2004, Takeovers and the dynamics of information flows, Vol: 22, Pages: 575-590
Chemla G, 2004, Downstream competition, foreclosure, and vertical integration, Journal of Economics & Management Strategy, Vol: 12, Pages: 261-29 pages, ISSN: 1058-6407
Chemla G, 2004, Pension fund investment in private equity and venture capital in the U.S. and Canada, Journal of Private Equity, Vol: 7, Pages: 64-8 pages, ISSN: 1096-5572
Chemla G, de Bettignies J-E, 2003, Corporate Venture Capital: The Upside of Failure and Competition for Talent
We consider the motives for a firm to engage in corporate venturing. We argue that in case of failure of a new venture, corporate venture capitalists (CVC) have a strategic advantage relative to traditional venture capitalists (VC) in creating rents after rehiring or refinancing the entrepreneurs. Hence, corporate venturing induces the would-be entrepreneur to exert an effort that is higher than within the corporation, but lower than under traditional venture capital financing. Ceteris paribus, the entrepreneur ends up with fewer shares and less control under CVC financing than under traditional VC financing. Competition from venture capitalists increases corporate venturing activity, the salaries of potential entrepreneurs, and total economic output. Our results are consistent with the observed pro-cyclicality of corporate venture capital activity with venture capital activity.
Chemla G, 2003, Takeovers and the Dynamics of Information Flows
This Paper analyses the effect of a possible takeover on information flows and on the terms of trade in business relationships. We consider a long-term relationship between a firm and a privately-informed stakeholder, a buyer for example. In our model, takeovers both increase the surplus from trade and enable the firm to extract a potentially higher share of the surplus from the buyer. The possibility of a takeover that leaves the buyer with a higher (lower) rent than the incumbent manager increases (decreases) the buyer's willingness to reveal their valuation. We suggest a number of testable predictions on the performance of takeover targets and trade credit.
Chemla G, 2003, Downstream Competition, Foreclosure, and Vertical Integration, Journal of Economics & Management Strategy, Vol: 12, Pages: 261-289
This paper analyzes the effect of competition among downstream firms on an upstream firm's payoff and on its incentive to integrate vertically when firms in both segments negotiate optimal contracts. We argue that as downstream competition becomes more intense, the upstream firm obtains a larger share of a smaller downstream industry profit. The upstream firm may encourage downstream competition (even excessively) in response to high downstream bargaining power. The option of vertical integration may be a barrier to entry downstream and may trigger strategic horizontal spinoffs or mergers. We extend the analysis to upstream competition. Copyright (c) 2003 Massachusetts Institute of Technology.
Chemla G, Habib MA, Ljungqvist AP, 2002, An Analysis of Shareholder Agreements
Shareholder agreements govern the relations among shareholders in privately-held companies, such as joint ventures or venture capital-backed …rms. We provide an explanation for the use of put and call options, pre-emption rights, drag-along rights, demand rights, tag-along rights, and catch-up clauses in shareholder agreements. We view these clauses as serving to preserve the parties’ incentives to make ex ante investments when ex post renegotiation may alter the parties’ shares of the payoff. We extend our framework to discuss the use of other clauses, such as the option to extend the life of a business alliance.
Chemla G, Faure-Grimaud A, 2001, Dynamic adverse selection and debt, European Economic Review, Vol: 45, Pages: 1773-1792, ISSN: 0014-2921
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