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Securities Auctions under Moral Hazard: An Experimental Study

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  • Shimon Kogan
  • John Morgan

Abstract

In many settings, including venture capital financing, mergers and acquisitions, and lease competition, the structure of the contracts over which firms compete differs. Furthermore, the structure of the contract affects the future incentives of the firm to engage in value-creating activities by potentially diluting effort or investment incentives. We study, both theoretically and in the lab, the performance of debt and equity auctions in the presence of both private information and hidden effort. We show that the revenues to sellers in debt and equity auctions differ systematically depending on the returns to entrepreneurial effort. Using a controlled laboratory experiments we test the model's predictions and find strong support for the theory. Copyright 2010, Oxford University Press.

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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 14 (2010)
Issue (Month): 3 ()
Pages: 477-520

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Handle: RePEc:oup:revfin:v:14:y:2010:i:3:p:477-520

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Cited by:
  1. Jun, Byoung Heon & Wolfstetter, Elmar G., 2012. "Security bid auctions for agency contracts," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 371, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Allison, Thomas H. & McKenny, Aaron F. & Short, Jeremy C., 2013. "The effect of entrepreneurial rhetoric on microlending investment: An examination of the warm-glow effect," Journal of Business Venturing, Elsevier, vol. 28(6), pages 690-707.
  3. Skrzypacz, Andrzej, 2013. "Auctions with contingent payments — An overview," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 666-675.
  4. Isa E. Hafalir & Hadi Yektas, 2010. "Selling Goods of Unknown Quality: Forward versus Spot Auctions," Department of Economics - Working Papers Series 1091, The University of Melbourne.
  5. Dai, Yun & Gryglewicz, Sebastian & Smit, Han T.J. & De Maeseneire, Wouter, 2013. "Similar bidders in takeover contests," Games and Economic Behavior, Elsevier, vol. 82(C), pages 544-561.
  6. Alexander S. Gorbenko & Andrey Malenko, 2011. "Competition among Sellers in Securities Auctions," American Economic Review, American Economic Association, vol. 101(5), pages 1806-41, August.

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