A Model of Market Discipline

56 Pages Posted: 3 Jun 2020 Last revised: 23 Oct 2020

See all articles by Colin Ward

Colin Ward

University of Minnesota - Carlson School of Management

Chao Ying

University of Minnesota - Twin Cities, Carlson School of Management

Date Written: October 22, 2020

Abstract

We develop an equilibrium model where cash holdings, costly refinancing policies, and managerial incentives are jointly determined to quantify the market's influence on management's ex ante behavior. We also derive a general formula that shows how agency and financing distortions shape payouts and compensation, two easily measured quantities. Our calibrated model estimates agency conflicts are nearly 10 times more severe than financial frictions for US public firms. Our analysis suggests that cutting corporate income taxes while introducing a tax on refinancing can reduce the relative severity of agency.

Keywords: Financial Frictions, Agency Conflicts, Dynamic Contracting, Refinancing, Payouts, Compensation

JEL Classification: D21, D61, D92, G32, G35, L22

Suggested Citation

Ward, Colin and Ying, Chao, A Model of Market Discipline (October 22, 2020). Available at SSRN: https://ssrn.com/abstract=3601084 or http://dx.doi.org/10.2139/ssrn.3601084

Colin Ward (Contact Author)

University of Minnesota - Carlson School of Management ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States

Chao Ying

University of Minnesota - Twin Cities, Carlson School of Management ( email )

Minneapolis, MN
United States

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