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# lec6 - Econ 138 Financial and Behavioral Economics Lecture...

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Econ 138 Financial and Behavioral Economics Lecture 6: Financing Constraints and Debt Overhang Ulrike Malmendier UC Berkeley Th ,Feb rua ry7 ,2008

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Organization issues Problem Set 1: being corrected right now. Problem Set 2: will be posted next Tuesday Will have empirical content and require the use of STATA. To get you started wit STATA, it will involve simple tasks: after down- loading data, read it into STATA, produce summary statistics, running simple regressions. Data will come from wrds.wharton.upenn.edu , which provides the key data in f nance. Let’s check it out together . ..
Got a class account. Usernames: mfe07, mfe07a, mfe07b Password (for all usernames): Mfe0307 [case-sensitive] Alternative: Go to wrds.wharton.upenn.edu/connect when in the Haas building or while using the campus VPN when not in Haas, and you can access the web-based version of WRDS. Increasingly more important data: Detailed data on personal characteristics of CEOs and top managers (partly in ExecuComp), e.g. details of their compensation, details of their education, their prior career Detailed data on boards (partly in IRRC = now RiskMetrics)

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1 Open questions from last lecture We considered the following simple investment setting: Manager (entrepreneur, borrower) has investment costing I ,ca shon hand C<I . Manager can work hard or shirk. Return consequences: work hard = return R w/prob. p H , else return 0 ; shirk = return R w/pr. p L <p H , else return 0 . We derived the folling lending condition : p H ( R B p H p L ) I C
wherewedenote p H ( R B p H p L ) as the (expected) pledgable income . The lending condition says: pledgable income has to be greater than in- vestor outlay. Solving the lending condition for C , we derived ‘minimum required cash’ or threshold level of cash C the manager needs to have at hand in order to obtain f nancing: C = I p H ( R B p H p L )

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Implications Project has positive NPV if manager works hard. But: is it clear that the manager can convince investors to work hard (= that we can f nd a contract which ensures that manager works hard) and, hence, gets f nancing?
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lec6 - Econ 138 Financial and Behavioral Economics Lecture...

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