Liu, JunJe (2017) Essays in contracting and liquidity provision. PhD thesis, University of Warwick.

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Abstract

The first essay considers a model in which an entrepreneur develops a technology and seeks to sell a stake of her asset for diversification purposes. In our model, output depends on both the quality of the asset and the non-contractible effort made by investors. In this case, signalling the asset type and motivating the investors are two conflicting objects. Our model shows that by applying a mechanism with endogenous commitment, entrepreneurs can achieve the second best allocation. Moreover, when the proportion of high type entrepreneurs is high, our model predicts that low-quality entrepreneurs will sell all of their shares above the fair price (overpricing) whereas the high-quality entrepreneurs may retain a fraction of their shares and sell their share below the fair price (underpricing).

The second essay illustrates a model in which an entrepreneur intends to securitize her risky asset to invest in a new project. In contrast to the settings of pecking order theory, outside investors are able to acquire the type information of the asset by making an effort. This new assumption allows the entrepreneurs to signal their types by motivating the investors’ information searching behaviour. Moreover, our model also endogenizes the existence of intermediaries in the issuing process. We conclude that if intermediaries are allowed to offer a menu of contracts to the entrepreneurs, a second best allocation can be sustained as an equilibrium.

The third essay considers a general model in which agents with different production technologies insure each other by entering a futures contract. However, unobservable risk exposure and strategic default of counterparty may prevent agents from fully hedging their risk. In this paper, we compare the market efficiency using two different trading mechanisms—OTC market and centralised clearinghouse. Our model shows that without any aggregate uncertainty, both mechanisms can achieve the second best allocation. Nevertheless, when aggregate uncertainty is introduced into the market, a centralised clearinghouse may dominate the OTC market by including more market participants and diversifying the risk more widely. Additionally, our model predicts that when aggregate uncertainty is extremely high, the central clearinghouse may have the incentive to provide extra liquidity to certain types of market participants for risk control purposes.

Item Type:	Thesis or Dissertation (PhD)
Subjects:	H Social Sciences > HG Finance
Library of Congress Subject Headings (LCSH):	Liquidity (Economics)., Entrepreneurship -- Economic aspects., Contracts.
Official Date:	January 2017
Dates:	Date Event January 2017 Submitted
Institution:	University of Warwick
Theses Department:	Warwick Business School
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Koufopoulos, Kostas ; Kozhan, Roman,1980-
Extent:	189 leaves
Language:	eng

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