The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Informed Lending and Security Design
Published: 09/19/2006 | DOI: 10.1111/j.1540-6261.2006.01053.x
ROMAN INDERST, HOLGER M. MUELLER
We examine the role of security design when lenders make inefficient accept or reject decisions after screening projects. Lenders may be either “too conservative,” in which case they reject positive‐NPV projects, or “too aggressive,” in which case they accept negative‐NPV projects. In the first case, the uniquely optimal security is debt. In the second case, it is levered equity. In equilibrium, profitable projects that are relatively likely to break even are financed with debt, while less profitable projects are financed with equity. Highly profitable projects are financed by uninformed arm's‐length lenders.
Internal versus External Financing: An Optimal Contracting Approach*
Published: 05/06/2003 | DOI: 10.1111/1540-6261.00557
Roman Inderst, Holger M. Müller
We study optimal financial contracting for centralized and decentralized firms. Under centralized contracting, headquarters raises funds on behalf of multiple projects. Under decentralized contracting, each project raises funds separately on the external capital market. The benefit of centralization is that headquarters can use excess liquidity from high cash‐flow projects to buy continuation rights for low cash‐flow projects. The cost is that headquarters may pool cash flows from several projects and self‐finance follow‐up investments without having to return to the capital market. Absent any capital market discipline, it is more difficult to force headquarters to make repayments, which tightens financing constraints ex ante. Cross‐sectionally, our model implies that conglomerates should have a lower average productivity than stand‐alone firms.
The Economics of Deferral and Clawback Requirements
Published: 05/28/2022 | DOI: 10.1111/jofi.13160
FLORIAN HOFFMANN, ROMAN INDERST, MARCUS OPP
We analyze the effects of regulatory interference in compensation contracts, focusing on recent mandatory deferral and clawback requirements restricting incentive compensation of material risk‐takers in the financial sector. Moderate deferral requirements have a robustly positive effect on risk‐management effort only if the bank manager's outside option is sufficiently high; otherwise, their effectiveness depends on the dynamics of information arrival. Stringent deferral requirements unambiguously backfire. Our normative analysis characterizes whether and how deferral and clawback requirements should supplement capital regulation as part of the optimal policy mix.