Insider Investor and Information

Ehsan Azarmsa, Lin William Cong

We model dynamic financing of innovative projects where relational financiers observe entrepreneurs' experimentation and thus information they endogenously produce, before deciding on continued financing. We show that enterpreneurs' optimal information productions follow threshold strategies. Insider financiers extract little or no intermin rent even with full information monopoly, hindering efficient financing ex ante. Independent experimentation by insiders mitigate the problem, but can be either a complement or substitute to entrepreneurs' information production.

Fire Sales, Indirect Contagion and Systemic Stress-Testing

Rama Cont, Eric Finn Schanning

We present a framework for modeling the phenomenon of fire sales in a network of financial institutions with common asset holdings, subject to leverage or capital constraints. Asset losses triggered by macro-shocks may interact with portfolio constraints, resulting in liquidation of assets, which in turn affects market prices, leading to contagion of losses when portfolios are marked to market. If mark-to-market losses are large, this may in turn lead to a new round of fire sales.

The Market for Financial Adviser Misconduct

Mark Egan

We construct a novel database containing the universe of financial advisers in the United States from 2005 to 2015, representing approximately 10% of employment of the finance and insurance sector. Roughly 7% of advisers have misconduct records. At some of the largest financial advisory firms in the United States, more than 15% of advisers have misconduct records. Prior offenders are five times as likely to engage in new misconduct as the average financial adviser. Firms discipline misconduct: approximately half of financial advisers lose their job after misconduct.