Department of Economics
W. P. Carey School of Business
Arizona State University
P.O. Box 873806
Tempe, AZ 85287-3806
Institutional Affiliation: Arizona State University
Information about this author at RePEc
NBER Working Papers and Publications
|December 2018||The Benchmark Inclusion Subsidy|
with Anil K. Kashyap, Jian Li, Anna Pavlova: w25337
We argue that a common practice of evaluating portfolio managers relative to a benchmark has real effects. Benchmarking generates additional, inelastic demand for assets inside the benchmark. This leads to a “benchmark inclusion subsidy:” a firm inside the benchmark values an investment project more than the one outside. The same wedge arises for valuing M&A, spinoffs, and IPOs. This overturns the standard corporate finance result that an investment’s value is independent of the entity considering it. We describe the characteristics that determine the subsidy, quantify its size (which could be large), and identify empirical work supporting our model’s predictions.
|March 2013||Who Should Pay for Credit Ratings and How?|
with Anil K. Kashyap: w18923
We analyze a model where investors use a credit rating to decide whether to finance a firm. The rating quality depends on unobservable effort exerted by a credit rating agency (CRA). We study optimal compensation schemes for the CRA when a planner, the firm, or investors order the rating. Rating errors are larger when the firm orders it than when investors do (and both produce larger errors than is socially optimal). Investors overuse ratings relative to the firm or planner. A trade-off in providing time-consistent incentives embedded in the optimal compensation structure makes the CRA slow to acknowledge mistakes.
Published: Anil K. Kashyap & Natalia Kovrijnykh, 2016. "Who Should Pay for Credit Ratings and How?," Review of Financial Studies, Society for Financial Studies, vol. 29(2), pages 420-456. citation courtesy of