Review of Finance Advance Access published online on April 14, 2009
Review of Finance, doi:10.1093/rof/rfp008
Securities Auctions under Moral Hazard: An Experimental Study*
1 McCombs School of Business, The University of Texas at Austin
2 Hass School of Business and Department of Economics, University of California, Berkeley
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.
Key Words: C92 • D02 • D44 • G32
* We thank the seminar participants at the University of California at Berkeley, the University of Nottingham, the 2007 Western Finance Association Meetings. We are indebted to Jacob Goeree for extremely helpful discussant comments and the Penn State CAPCP 2008 Conference on Auctions and Procurements. We are especially grateful to Hayne Leland, Stewart Myers, Bryan Routledge, Jacob Sagi, Martin Sefton and Vijay Krishna for helpful discussions. The second author gratefully acknowledges the financial support of the National Science Foundation.