The Journal of Finance

Financing and Advising: Optimal Financial Contracts with Venture Capitalists

Published: 9/11/2003,  Volume: 58,  Issue: 5  |  DOI: 10.1111/1540-6261.00597  |  Cited by: 460

Catherine Casamatta

AbstractThis paper analyses the joint provision of effort by an entrepreneur and by an advisor to improve the productivity of an investment project. Without moral hazard, it is optimal that both exert effort. With moral hazard, if the entrepreneur's effort is more efficient (less costly) than the advisor's effort, the latter is not hired if she does not provide funds. Outside financing arises endogenously. This explains why investors like venture capitalists are value enhancing. The level of outside financing determines whether common stocks or convertible bonds should be issued in response to incentives.

Managerial Legacies, Entrenchment, and Strategic Inertia

Published: 11/9/2010,  Volume: 65,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2010.01619.x  |  Cited by: 41

CATHERINE CASAMATTA, ALEXANDER GUEMBEL

This paper argues that the legacy potential of a firm's strategy is an important determinant of CEO compensation, turnover, and strategy change. A legacy makes CEO replacement expensive, because firm performance can only partially be attributed to a newly employed manager. Boards may therefore optimally allow an incumbent to be entrenched. Moreover, when a firm changes strategy it is optimal to change the CEO, because the incumbent has a vested interest in seeing the new strategy fail. Even though CEOs have no specific skills in our model, legacy issues can explain the empirical association between CEO and strategy change.

Optimal Leverage and Aggregate Investment

Published: 8/1999,  Volume: 54,  Issue: 4  |  DOI: 10.1111/0022-1082.00147  |  Cited by: 107

Bruno Biais, Catherine Casamatta

We analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures. Optimal financial contracts can be implemented by a combination of debt and equity when the risk‐shifting problem is the most severe while stock options are also needed when the effort problem is the most severe. Worsening of the moral hazard problems leads to decreases in investment and output at the macroeconomic level. Moreover, aggregate leverage decreases with the risk‐shifting problem and increases with the effort problem.

Equilibrium Bitcoin Pricing

Published: 2/9/2023,  Volume: 78,  Issue: 2  |  DOI: 10.1111/jofi.13206  |  Cited by: 207

BRUNO BIAIS, CHRISTOPHE BISIÈRE, MATTHIEU BOUVARD, CATHERINE CASAMATTA, ALBERT J. MENKVELD

We offer a general equilibrium analysis of cryptocurrency pricing. The fundamental value of the cryptocurrency is its stream of net transactional benefits, which depend on its future prices. This implies that, in addition to fundamentals, equilibrium prices reflect sunspots. This in turn implies multiple equilibria and extrinsic volatility, that is, cryptocurrency prices fluctuate even when fundamentals are constant. To match our model to the data, we construct indices measuring the net transactional benefits of Bitcoin. In our calibration, part of the variations in Bitcoin returns reflects changes in net transactional benefits, but a larger share reflects extrinsic volatility.

Hedging and Coordinated Risk Management: Evidence from Thrift Conversions

Published: 6/1998,  Volume: 53,  Issue: 3  |  DOI: 10.1111/0022-1082.00041  |  Cited by: 200

Catherine Schrand, Haluk Unal

We provide an explanation for hedging as a means of allocating rather than reducing risk. We argue that when increases in total risk are costly, firms optimally allocate risk by reducing (increasing) exposure to risks that provide zero (positive) economic rents. Our evidence shows that mutual thrifts that convert to stock institutions increase total risk following conversion, consistent with their increased abilities and incentives for risk taking. They achieve this increase by hedging interest‐rate risk and increasing credit risk. We provide some evidence that risk‐management activities are related to growth capacity and management compensation structure attained at conversion.

Intradaily Price‐Volume Adjustments of NYSE Stocks to Unexpected Earnings

Published: 6/1988,  Volume: 43,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1988.tb03950.x  |  Cited by: 39

CATHERINE S. WOODRUFF, A. J. SENCHACK

The speed and path of adjustment in stocks to the degree of earnings surprise in their quarterly announcements are studied using price‐volume transactions data. A differential price‐adjustmentp rocess was observed,w ith stocks having large,p ositive earnings surprises experiencing a faster adjustment compared with those stocks with negative earnings surprises. Volume, transaction frequency, and size were found to be directly related to the absolute degree of surprise,b ut very favorablee arnings‐surprises tocks experienced initially a large number of smaller trades while stocks with large unfavorable earnings surprises had relatively fewer transactions but higher volume per trade.

Social Security and Trends in Wealth Inequality

Published: 4/7/2025,  Volume: 80,  Issue: 3  |  DOI: 10.1111/jofi.13440  |  Cited by: 13

SYLVAIN CATHERINE, MAX MILLER, NATASHA SARIN

Recent influential work finds large increases in inequality in the United States based on measures of wealth concentration that notably exclude the value of social insurance programs. This paper shows that top wealth shares have not changed much over the last three decades when Social Security is properly accounted for. This is because Social Security wealth increased substantially from $7.2 trillion in 1989 to $40.6 trillion in 2019 and now represents nearly 50% of the wealth of the bottom 90% of the wealth distribution. This finding is robust to potential changes to taxes and benefits in response to system financing concerns.

Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden

Published: 4/8/2024,  Volume: 79,  Issue: 3  |  DOI: 10.1111/jofi.13341  |  Cited by: 26

SYLVAIN CATHERINE, PAOLO SODINI, YAPEI ZHANG

Using Swedish administrative panel data, we document that workers facing higher left‐tail income risk when equity markets perform poorly have lower portfolio equity share. In line with theory, the relationship between cyclical skewness and stock holdings increases with the share of human capital in a worker's total wealth and vanishes as workers get closer to retirement. Cyclical skewness also predicts portfolio differences within pairs of identical twins. Our findings show that households hedge against correlated tail risks, an important mechanism in asset pricing and portfolio choice models.

Why Firms Use Currency Derivatives

Published: 9/1997,  Volume: 52,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1997.tb01112.x  |  Cited by: 724

CHRISTOPHER GÉCZY, BERNADETTE A. MINTON, CATHERINE SCHRAND

We examine the use of currency derivatives in order to differentiate among existing theories of hedging behavior. Firms with greater growth opportunities and tighter financial constraints are more likely to use currency derivatives. This result suggests that firms might use derivatives to reduce cash flow variation that might otherwise preclude firms from investing in valuable growth opportunities. Firms with extensive foreign exchange‐rate exposure and economies of scale in hedging activities are also more likely to use currency derivatives. Finally, the source of foreign exchange‐rate exposure is an important factor in the choice among types of currency derivatives.

Taking a View: Corporate Speculation, Governance, and Compensation

Published: 9/4/2007,  Volume: 62,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2007.01279.x  |  Cited by: 180

CHRISTOPHER C. GÉCZY, BERNADETTE A. MINTON, CATHERINE M. SCHRAND

Using responses to a well‐known confidential survey, we study corporations' use of derivatives to “take a view” on interest rate and currency movements. Characteristics of speculators suggest that perceived information and cost advantages lead them to take positions actively; that is, they do not speculate to increase risk by “betting the ranch.” Speculating firms encourage managers to speculate through incentive‐aligning compensation arrangements and bonding contracts, and they use derivatives‐specific internal controls to manage potential abuse. Finally, we examine whether investors reading public corporate disclosures are able to identify firms that indicate speculating in the confidential survey; they are not.

International Investment Restrictions and Closed‐End Country Fund Prices

Published: 6/1990,  Volume: 45,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1990.tb03701.x  |  Cited by: 79

CATHERINE BONSER-NEAL, GREGGORY BRAUER, ROBERT NEAL, SIMON WHEATLEY

Some closed‐end country funds trade at large premiums relative to their net asset values. This paper examines whether international investment restrictions raise country fund price‐net asset value ratios by segmenting international capital markets. We test whether a relation exists between announcements of changes in investment restrictions and changes in these ratios using weekly data from May 1981 to January 1989. The results provide evidence that some foreign markets are at least partially segmented from the U.S. capital market.

Quantifying Reduced‐Form Evidence on Collateral Constraints

Published: 6/15/2022,  Volume: 77,  Issue: 4  |  DOI: 10.1111/jofi.13158  |  Cited by: 46

SYLVAIN CATHERINE, THOMAS CHANEY, ZONGBO HUANG, DAVID SRAER, DAVID THESMAR

This paper quantifies the aggregate effects of financing constraints. We start from a standard dynamic investment model with collateral constraints. In contrast to the existing quantitative literature, our estimation does not target the mean leverage ratio to identify the scope of financing frictions. Instead, we use a reduced‐form coefficient from the recent corporate finance literature that connects exogenous debt capacity shocks to corporate investment. Relative to a frictionless benchmark, collateral constraints induce losses of 7.1% for output and 1.4% for total factor productivity (TFP) (misallocation). We show these estimated losses tend to be more robust to misspecification than estimates obtained by targeting leverage.