Corporate Finance

We develop a dynamic valuation model of private equity (PE) investments by solving the portfolio-choice problem for a risk-averse investor (LP), who invests in a PE fund, managed by a general partner (GP). Key features are illiquidity, leverage, GP value-adding skills (alpha), and compensation, including management fees and carried interest. We find that the costs of management fees, carried interest, and illiquidity are high, and the GP needs to generate substantial value to cover these costs. Leverage substantially reduces these costs.

We study a dynamic-contracting problem involving risk sharing between two parties — the Proposer and the Responder — who invest in a risky asset until an exogenous but random termination time. In any time period they must invest all their wealth in the risky asset, but they can share the underlying investment and termination risk. When the project ends they consume their final accumulated wealth. The Proposer and the Responder have constant relative risk aversion R and r respectively, with R > r > 0.

This paper explores the links between firms' voluntary disclosures and their cost of capital. Existing studies investigate the relation between mandatory disclosures and cost of capital, and find no cross-sectional effect but a negative association in time-series. In this paper, I find that when disclosure is voluntary firms that disclose their information have a lower cost of capital than firms that do not disclose, but the association between voluntary disclosure and cost of capital for disclosing and non-disclosing firms is positive in aggregate.

Using data from a major mortgage bank, we examine the predictive power of mortgage delinquency models as an aggregate measure of the quality of information recorded at loan origination. We measure model predictive power using an out-of-sample prediction criterion and compare predictive power of delinquency models over time and across loans of different documentation levels and origination channels.

We develop a liability driven investment framework that incorporates downside risk penalties for not meeting liabilities. The shortfall between the asset and liabilities can be valued as an option which swaps the value of the endogenously determined optimal portfolio for the value of the liabilities. The optimal portfolio selection exhibits endogenous risk aversion and as the funding ratio deviates from the fully funded case in both directions, effective risk aversion decreases.

Substantial evidence suggests that discount factors vary significantly between individuals and that this variation exists between members of the same household. This paper introduces a model of consumption and savings in which household members discount the utility from their future consumption at different rates. Each period household members bargain efficiently over their consumption and saving choices.

Modern electronic markets have been characterized by a relentless drive toward faster decision making. Significant technological investments have led to dramatic improvements in latency, the delay between a trading decision and the resulting trade execution. We describe a theoretical model for the quantitative valuation of latency. Our model measures the trading frictions created by the presence of latency, by considering the optimal execution problem of a representative investor.

How are the designs of corporate buildings used to create meaning and project a corporate image and personality" We distinguish functionalist architecture ("form follows function"), which focuses on the primary, utilitarian function of a building, from experiential architecture ("from function to form"), which uses the form of a building to communicate symbolically about the organization.

The financial crisis that erupted in late 2007 has resurfaced debates about the role of accounting and external financial reporting by financial institutions in helping detect or mask systemic risks and in exacerbating or mitigating such risks. The debate has largely focused on the role of fair value accounting, securitization and special purpose entities, off-balance sheet reporting and pro-cyclicality. We consider these and other issues using a single company's published accounts.