Working Papers

Money Management and Real Investment, with Simon Gervais, October 2021.

We propose and analyze an equilibrium model of money management in which the allocation of funds made by money managers across firms affects the production of these firms. The model produces two main results. First, comparing the performance of money managers to that of the overall market portfolio becomes less appropriate as investors (endogenously) choose to delegate more of their money to them. Indeed, as money managers control more money, their holdings get closer to the market portfolio, making it less likely that they outperform it. Second, although money managers may be outperformed by the market portfolio after their fees are taken into account, it is optimal for investors to delegate their money to them. This is because money managers prompt a more efficient allocation of capital across firms, making the economy more productive and firms more valuable in the process. In fact, as we show, the presence of money managers can improve the welfare of all investors, whether or not these investors choose to delegate their investment decisions to money managers.

Rational Disposition Effects: Theory and Evidence, with Daniel Dorn, October 2021.

The disposition effect is a longstanding puzzle in financial economics. This paper demonstrates that it is not intrinsically at odds with rational behavior. In a rational expectations model with asymmetrically informed investors, trading strategies as predicted by the disposition effect can arise as an optimal response to dynamic changes in the information structure. The model predicts that the disposition behavior of uninformed investors weakens after events that reduce information asymmetries. The data, trading records of 50,000 clients at a German discount brokerage firm from 1995 to 2000, are consistent with this prediction.

Lying to Speak the Truth: Selective Manipulation and Improved Information Transmission, with Paul Povel, September 2021.

We analyze a principal-agent model in which an effort-averse agent can manipulate a publicly observable performance report. The principal cannot observe the agent's cost of effort, her effort choice, and whether she manipulated the report. An optimal contract links compensation to both the eventually realized output and the (possibly manipulated) report, since both are informative about effort provision. We show that the optimal contract may incentivize selective manipulation of an unfavorable report by an agent who exerted a high level of effort. Doing so can convert a "falsely" negative report into a positive one, thereby making the report more informative about the agent's effort choice.

Credit Ratings: Strategic Issuer Disclosure and Optimal Screening, with Jonathan Cohn and Uday Rajan, July 2018.

We study a model in which an issuer can manipulate information obtained by a credit rating agency (CRA). Better CRA screening reduces the likelihood of a high rating, but increases the value of a rated security. We find that improving the prior quality of assets can have no effect on the quality of a high-rated security, as low-type issuers manipulate more often in equilibrium. The issuer's response to anticipated CRA screening can either amplify or attenuate the effects on accuracy of increased penalties for ratings errors. Our model highlights the importance of strategic issuer disclosure in recent ratings failures.

The Effect of Speculative Monitoring on Shareholder Activism, February 2018.

This paper investigates how informed trading in financial markets affects the incentive of a large shareholder to monitor a company. The shareholder engages in costly monitoring activities to the extent that she can profitably trade on her private information about these activities. By making stock prices more informative about these activities, informed trading increases the shareholder's incentive to undertake such value-enhancing activities in case she has to liquidate her stake before their effect is publicly observed. This reduces the size of the stake that the shareholder has to acquire to commit to her desired level of monitoring. At the same time, a more informative stock price reduces the value of the shareholder's private information and hence her benefit from monitoring. If acquiring a large stake is excessively costly to the shareholder, the former effect dominates and an increase in informed trading can lead to an increase in monitoring efforts. In this case, there is a complementarity between shareholder activism and informed trading, and multiple equilibria with different levels of ownership concentration and monitoring may coexist.

On the Optimal Allocation of Security Listings to Specialists, March 2013.

This paper addresses the question of how securities with correlated payoffs should be allocated to dealers in a specialist system. Using a multi-asset model of an imperfectly competitive market, we examine the effect of alternative security allocations on the specialists' market power and on their adverse selection risk. We demonstrate that specialists are always better off when their portfolios contain securities with highly correlated payoffs, and provide conditions under which risk-averse investors prefer such an allocation as well. Intuitively, this is the case when the investors' order flow is sufficiently informative about the value of the traded securities. We also discuss how the allocation of security listings to specialists affects market liquidity.