Corporate Finance

This paper proposes a simple model to study how domestic institutions affect patterns of international capital flows. Inefficient financial system, and poor corporate governance, may be bypassed by two-way capital flows in which domestic savings leave the country in the form of financial capital outflows but domestic investment takes place via inward FDI. While financial globalization always improves the welfare of a developed country with a good financial system, its effect is ambiguous for a developing country with an inefficient financial sector or poor corporate governance.

In the fall of 2008, fifteen of the world's leading economists — representing the broadest spectrum of economic opinion — gathered at New Hampshire's Squam Lake. Their goal: the mapping of a long-term plan for financial regulation reform.

This article starts by discussing the concept of "inflation hedging" and provides estimates of "inflation betas" for standard bond and well-diversified equity indices for over 45 countries. We show that such standard securities are poor inflation hedges. Expanding the menu of assets to Treasury bills, foreign bonds, real estate and gold improves matters but inflation risk remains difficult to hedge. We then describe how state-of-the-art term structure research has tried to uncover estimates of the inflation risk premium, the compensation for bearing inflation risk.

We examine the issue of executive compensation within an inter-temporal general equilibrium production context. Inter-temporal optimality places strong restrictions on the form of a representative manager's compensation contract, restrictions that appear to be incompatible with the fact that the bulk of many high-profile managers' compensation is in the form of various options and option-like rewards. We therefore measure the extent to which “options-like” convex contracts alone can induce the manager to adopt near-optimal investment and hiring decisions.

We examine whether securitization impacts renegotiation decisions of loan servicers, focusing on their decision to foreclose a delinquent loan. Conditional on a loan becoming seriously delinquent, we find a significantly lower foreclosure rate associated with bank-held loans when compared to similar securitized loans: across various specifications and origination vintages, the foreclosure rate of delinquent bankheld loans is 3% to 7% lower in absolute terms (13% to 32% in relative terms).

This is a fictitious case in which Universal Studies, a major U.S. theme parks and resorts company, has to negotiate with China's central government to build its first theme park in the country. Students are divided into groups and each student is assigned a role as one of the negotiators or as an observer. The topics covered in the negotiation include the new theme park's location, ownership structure, size, nature of theme zones, local employment and hospitality training programmes.

We argue that a fundamental reason for the short-term perspective of corporate executives is the short-term orientation of shareholders themselves and the financial markets that drive the performance benchmarks of CEOs. Although some shareholders are prepared to take a more long-term view they are generally not rewarded for their loyalty to the company.

In order to address the issue of the welfare costs of informed trade, a new Glosten-Milgrom type model is constructed with elastic uninformed trade. Since uninformed trade is elastic, there are some uninformed who choose not to trade because their idiosyncratic valuation lies within the spread. This lack of trade is a welfare loss and the model can be used to estimate the magnitude of the loss. Calculations show that the welfare loss tends to be single-peaked in the amount of informed trade, reaching a maximum at an internal point.

This article studies optimal mortgage design in a continuous-time setting with volatile and privately observable income, costly foreclosure, and a stochastic market interest rate. We show that the features of the optimal mortgage are consistent with an option adjustable-rate mortgage (option ARM). Under the optimal contract, the borrower is given discretion of how much to repay until his balance reaches a certain limit. The default rates and interest rate payment on the mortgage correlate positively with the market interest rate.