The Journal of Finance

Security Design with Investor Private Information

Published: 11/28/2007   |   DOI: 10.1111/j.1540-6261.2007.01287.x

ULF AXELSON

I study the security design problem of a firm when investors rather than managers have private information about the firm. I find that it is often optimal to issue information‐sensitive securities such as equity. The “folklore proposition of debt” from traditional signaling models only goes through if the firm can vary the face value of debt with investor demand. When the firm has several assets, debt backed by a pool of assets is optimal when the degree of competition among investors is low, while equity backed by individual assets is optimal when competition is high.

Wall Street Occupations

Published: 02/03/2015   |   DOI: 10.1111/jofi.12244

ULF AXELSON, PHILIP BOND

Many finance jobs entail the risk of large losses, and hard‐to‐monitor effort. We analyze the equilibrium consequences of these features in a model with optimal dynamic contracting. We show that finance jobs feature high compensation, up‐or‐out promotion, and long work hours, and are more attractive than other jobs. Moral hazard problems are exacerbated in booms, even though pay increases. Employees whose talent would be more valuable elsewhere can be lured into finance jobs, while the most talented employees might be unable to land these jobs because they are “too hard to manage.”

Informational Black Holes in Financial Markets

Published: 08/15/2023   |   DOI: 10.1111/jofi.13270

ULF AXELSON, IGOR MAKAROV

We show that information aggregation in primary financial markets fails precisely when investors hold socially useful information for screening projects. Being wary of the Winner's Curse, less optimistic investors refrain from making financing offers, since their offers would be accepted only when a project is unviable. Their information is therefore lost. The Winner's Curse and associated information loss grow with the number of informed market participants, so that larger markets can lead to worse financing decisions and higher cost of capital for firms seeking financing. Precommitment to ration fundraising allocations, collusive club bidding, and shorting markets can mitigate the inefficiency.

Why Are Buyouts Levered? The Financial Structure of Private Equity Funds

Published: 07/16/2009   |   DOI: 10.1111/j.1540-6261.2009.01473.x

ULF AXELSON, PER STRÖMBERG, MICHAEL S. WEISBACH

Private equity funds are important to the economy, yet there is little analysis explaining their financial structure. In our model the financial structure minimizes agency conflicts between fund managers and investors. Relative to financing each deal separately, raising a fund where the manager receives a fraction of aggregate excess returns reduces incentives to make bad investments. Efficiency is further improved by requiring funds to also use deal‐by‐deal debt financing, which becomes unavailable in states where internal discipline fails. Private equity investment becomes highly sensitive to aggregate credit conditions and investments in bad states outperform investments in good states.

Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts

Published: 07/26/2013   |   DOI: 10.1111/jofi.12082

ULF AXELSON, TIM JENKINSON, PER STRÖMBERG, MICHAEL S. WEISBACH

Private equity funds pay particular attention to capital structure when executing leveraged buyouts, creating an interesting setting for examining capital structure theories. Using a large, international sample of buyouts from 1980 to 2008, we find that buyout leverage is unrelated to the cross‐sectional factors, suggested by traditional capital structure theories, that drive public firm leverage. Instead, variation in economy‐wide credit conditions is the main determinant of leverage in buyouts. Higher deal leverage is associated with higher transaction prices and lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.