Working Papers

Information Manipulation and Optimal Screening, with Jonathan Cohn and Uday Rajan, July 2022.

We consider a model in which a privately-informed seller (an issuer of a financial security) can manipulate the information provided to a third-party certifier (a credit rating agency). Manipulation incentives increase if a high rating corresponds to a greater proportion of high-type sellers, for example due to more intense  screening or improved prior asset quality. This effect can be so severe that (i) with a better prior quality for the asset, overall rating accuracy may decline and (ii) in a two-period setting, rating accuracy in the first period can decrease if the rating agency faces higher penalties for rating errors.

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.

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.