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Regular version of the site

Publications in 2013

Shareholder protection and outside blockholders: Substitutes or complements?

Author: Stepanov S.

Journal of Institutional and Theoretical Economics 2013, 169 (2), pp. 355-381

Should outside blockholders be more common in countries with weaker shareholder protection? I show that there can be a U-shape dependence of the outside ownership concentration on the quality of shareholder protection. This result is in line with the recent empirical evidence questioning the traditional law-and-finance view. In my model, a lower cost of private benefit extraction makes outside monitoring less desirable for an entrepreneur, thereby calling for a smaller outside blockholder's share. However, a low blockholder's share may provoke collusion between the entrepreneur and the blockholder, which hampers raising funds from dispersed shareholders. This trade-off yields the described U-shape relationship.

To the article

Hidden and Displayed Liquidity in Securities Markets with Informed Liquidity Providers

Author: Boulatov A.

Review of Financial Studies 2013, 26 (8), pp. 2096-2137

We examine the impact on the quality of a securities market of hiding versus displaying orders that provide liquidity. Display expropriates informational rents from informed agents who trade as liquidity providers. The informed then exit liquidity provision in favor of demanding liquidity where they trade less aggressively. Trading costs to uninformed liquidity demanders are higher, bid-ask spreads are wider, and midquotes are less informationally efficient when orders that provide liquidity are displayed. Our analysis suggests that market innovations, which might seem to favor the informed over the uninformed, can enhance market quality by intensifying competition among the informed.

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Global Imbalances and Taxing Capital Flows

Author: Peiris U

International Journal of Central Banking 2013, 9 (2), pp. 13-44, 

We study a monetary economy with two large open economies displaying net real and financial flows. If default on cross-border loans is possible, taxing financial flows can reduce its negative consequences. In doing so it can improve welfare unilaterally, in some cases in a Pareto sense, via altering the terms of trade and reducing the costs of such default.

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Savings and default

Author: Peiris U

Economic Theory, pp. 1-28, 2013 year 

In the presence of uninsurable idiosyncratic risk, the optimal credit contract allows for the possibility of default. In addition, the optimal contract incorporates a precautionary savings motive over and above what agents would otherwise save. When default is sufficiently high, credit markets may collapse. A regulatory requirement on the level of savings can increase risk sharing and improve welfare by increasing the gains to trade in credit exchange. Under the appropriate verifiability condition on the level of savings, an appropriate market structure, agents voluntarily increase their level of storage such that trade and welfare improve. 

Keywords: Credit; Default; Endogenous contracts; Precautionary savings; Uninsurable risk
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The Risk Sharing Implications of Disaster Insurance Funds

Authors: Boulatov A., Dieckmann S.

Journal of risk and insurance, Vol. 80, Issue 1, March 2013, pp. 37-64 

We study the risk sharing implications that arise from introducing a disaster relief fund to the cat insurance market. Such a form of intervention can increase efficiency in the private market, and our design of disaster relief suggests a prominent role of catastrophe reinsurance. The model predicts buyers to increase their demand in the private market, and the seller to lower prices to such an extent that her revenues decrease upon introduction of disaster relief. We test two predictions in the context of the Terrorism Risk Insurance Act (TRIA). It is already known the introduction of TRIA led to negative abnormal returns in the insurance industry. In addition, we show this negative effect is stronger for larger and for low risk-averse firms -- two results that are consistent with our model. The seller's risk aversion plays an important role in quantifying such feedback effects, and we point towards possible distortions in which a firm may even be overhedged upon introduction of disaster relief.

Keywords:  Catastrophe Risk, Government Intervention, TRIA, Reinsurance

JEL Classifications:  D42, G22, H30


 

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