Curriculum vitae

Chemla Gilles

Directeur de recherche CNRS
DRM

Gilles.CHEMLAping@dauphinepong.fr

Publications

Articles

Chemla G., Hennessy C. (2016), Government as Borrower of First Resort, Journal of Monetary Economics, 84, p. 1-16

We examine optimal supply of safe government bonds accounting for their effect on corporate debt markets. Government bonds are shown to influence leverage under asymmetric information regarding corporate cash flows and safe asset scarcity. Corporations have incentives to issue junk debt in response to safe asset scarcity since uninformed investors then migrate to junk debt markets. Uninformed demand stimulates informed speculation which drives junk debt prices closer to fundamentals, encouraging pooling at high leverage. Acting as borrower of first resort, the government can issue safe bonds which siphon off uninformed demand for risky corporate debt and reduce socially wasteful informed speculation. Thus, government bonds either eliminate pooling at high leverage or improve risk sharing in such equilibria. An optimal supply of government bonds is increasing in both marginal Q and the intrinsic demand for safe assets.

Chemla G., Hennessy C. (2014), Skin in the Game and Moral Hazard, The Journal of Finance, 69, 4, p. 1597–1641

What determines equilibrium securitization levels, and should they be regulated? To address these questions we develop a model where originators can exert unobservable effort to increase asset quality, subsequently having private information regarding quality when selling ABS to rational investors. In equilibrium, all originators have low/zero retentions if they are financially constrained and/or prices are su¢ ciently informative. Asymmetric information lowers effort incentives in all equilibria. Effort is promoted by junior retentions, investor sophistication, andinformative prices. Optimal regulation promotes effort while accounting for investor-level externalities. It entails either a menu of junior retentions or a single junior retention with sizedecreasing in price informativeness. Mandated market opacity is only optimal amongst regulations failing to induce originator effort.

Chemla G., Porchet A., Aïd R., Touzi N. (2011), Hedging and vertical integration in electricity markets, Management Science, 57, 8, p. 1438-1452

This paper analyzes the interactions between competitive (wholesale) spot, retail, and forward markets and vertical integration in electricity markets. We develop an equilibrium model with producers, retailers, and traders to study and quantify the impact of forward markets and vertical integration on prices, risk premia, and retail market shares. We point out that forward hedging and vertical integration are two separate mechanisms for demand and spot price risk diversification that both reduce the retail price and increase retail market shares. We show that they differ in their impact on prices and firms utility because of the asymmetry between production and retail segments. Vertical integration restores the symmetry between producers and retailers exposure to demand risk, whereas linear forward contracts do not. Vertical integration is superior to forward hedging when retailers are highly risk averse. We illustrate our analysis with data from the French electricity market

De Bettignies J-E., Chemla G. (2008), Corporate Venturing, allocation of talent, and competition for star managers, Management Science, 54, 3, p. 505-521

We provide new rationales for corporate venturing (CV), based on competition for talented managers. As returns to venturing increase, firms engage in CV for reasons other than capturing these returns. First, higher venturing returns increase managerial compensation, to which firms respond by increasing the power of incentives. Managers increase effort, prompting firms to reallocate them to new ventures, where the marginal product of effort is highest. Second, as returns to venturing become large, CV emerges as a way to recruit/retain managers who would otherwise choose alternative employment. We derive several testable empirical predictions about the determinants and structure of CV.

Ljungqvist A., Habib M., Chemla G. (2007), An Analysis of Shareholder Agreements, Journal of the European Economic Association, 5, 1, p. 93-121

Shareholder agreements govern the relations among shareholders in privately held firms, such as joint ventures and venture capital-backed companies. We provide an economic explanation for key clauses in such agreements--namely, put and call options, tag-along and drag-along rights, demand and piggy-back rights, and catch-up clauses. In a dynamic moral hazard setting, we show that these clauses can ensure that the contract parties make efficient ex ante investments in the firm. They do so by constraining renegotiation. In the absence of the clauses, ex ante investment would be distorted by unconstrained renegotiation aimed at (i) precluding value-destroying ex post transfers, (ii) inducing value-increasing ex post investments, or (iii) precluding hold-out on value-increasing sales to a trade buyer or the IPO market.

Chemla G. (2005), Hold-Up, Stakeholders and Takeover Threats, Journal of financial intermediation, 14, 3, p. 376-397

We analyze the impact of takeover threats on long term relationships between the target owners and other stakeholders. In the absence of takeovers, stakeholders' bargaining power increases their incentive to invest but reduces the owners' incentive to invest. The threat of a takeover that would transfer value from the stakeholders reduces their ex ante investment. However, the stakeholders may appropriate ex post some value created by a takeover. This can prevent some value-enhancing takeovers. We examine extensions to the disciplinary role of takeovers, takeover defence mechanisms, and trade credit, and discuss empirical predictions.

Chemla G. (2004), Takeovers and the dynamics of information flows, International journal of industrial organization, 22, 4, p. 575-590

This Paper analyses the effect of a possible takeover on information flows and on the terms of trade in business relationships. We consider a long-term relationship between a firm and a privately-informed stakeholder, a buyer for example. In our model, takeovers both increase the surplus from trade and enable the firm to extract a potentially higher share of the surplus from the buyer. The possibility of a takeover that leaves the buyer with a higher (lower) rent than the incumbent manager increases (decreases) the buyer's willingness to reveal their valuation. We suggest a number of testable predictions on the performance of takeover targets and trade credit.

Chemla G. (2004), Pension Fund Investment in Private Equity and Venture Capital in the U.S. and Canada, The Journal of Private Equity, 7, 2, p. 64-71

This article provides a comparative analysis of pension plan allocations to private equity and to venture capital in the United States and in Canada. Although the assets of American funds in our data are worth 10 times those of Canadian funds, their investment in private equity is about 20 times larger. Asset size is an important determinant of the decision to invest in private equity in both countries, but it is only a determinant of how much to invest in Canada. Asset size appears to be an important factor in explaining the difference in private equity investment, but it is not sufficient to explain it in its entirety. We examine other possible explanatory factors, such as fund types and location, the institutional environment, and regulatory constraints.

Chemla G. (2003), Downstream Competition, Foreclosure, and Vertical Integration, Journal of economics & management strategy, 12, 2, p. 261-289

This paper analyses the impact of competition among downstream firms on an upstream firm's payoff and on its incentive to vertically integrate when firms on both segments negotiate optimal contracts. We argue that tougher competition decreases the downstream industry profit, but improves the upstream firm's negotiation position. In particular, the upstream firm is better off encouraging competition when the downstream firms have high bargaining power. We derive implications on the interplay between vertical integration and competition among the downstream firms. The mere possibility of vertical integration may constitute a barrier to entry and may trigger strategic horizontal spin-offs or mergers. We discuss the impact of upstream competition on our results.

Faure-Grimaud A., Chemla G. (2001), Dynamic Adverse Selection and Debt, European Economic Review, 45, 9, p. 1773-1792

Chemla G. (2000), Book review : Financial Analysis and Corporate Strategy. M Grinblatt, S Titman, The Review of Financial Studies, 13, 1, p. 249-256

Reviews the book 'Financial Analysis and Corporate Strategy,' by Mark Grinblatt and Sheridan Titman.

Chemla G. (1999), The Impact of Negociation and Takeover Threats on the Magnitude of the Ratchet Effect, Annales d'Economie et de Statistique, 54, p. 157-171

Chemla G. (1997), The Theory of the Firm and Incomplete Contracts, Revue d'économie politique, 107, 3, p. 295-330

Chapitres d'ouvrage

Pop D., Pop A., Chemla G. (2010), Privatization and governance regulation in frontier emerging markets: The case of Romania, in Kaufman G., Bliss R. (eds), Financial Institutions and Markets The Financial Crisis: An Early Retrospective, Palgrave Macmillan

We investigate the link between the regulation of control transactions and the institutional and corporate features of public companies, by analyzing the massive delisting activity in the Romanian capital market. The peculiar ownership reforms involving a large number of listed companies offer a unique opportunity to test Bebchuk and Roe's (2000) theory of path dependence. Over time, the Romanian authorities have undertaken wide-ranging institutional reforms, most of which favoring blockholders over small and dispersed shareholders. Our empirical approach, based on logit and duration models, allows us to analyze the evolution of public companies over this period and sheds light on the likely events causing the eclipse of frontier emerging markets. Our main findings reveal that delisting is more likely to occur when (i) the shareholdings acquired from the privatization authority by circumventing the capital market are high; (ii) the company experiences frequent takeover bids; and (iii) the stock liquidity is low.

Communications

Chemla G., Pontuch P. (2012), Labor Intensity and Expected Stock Returns, 2012 FMA European Conference, Istanbul, TURKEY

This paper analyses the effects of labor intensity on a firm's operating risk and its expected stock returns. We isolate a pure labor intensity effect by using a relative measure with respect to the three-digit industry median level. We show that labor intensity is positively associated with operating leverage, at least in the small and medium-sized firms sub sample. Stock and portfolio returns of small and, to a lesser extent, mid cap firms are positively associated with labor intensity after controlling for traditional risk factors. In particular, the labor-induced operating leverage does not seem to be explained by the book-to-market factor. The relationship between labor intensity and stock returns is stronger in low wage industries and at medium levels of financial leverage.

Chemla G., Hennessy C. (2011), Privately Optimal Securitization and Publicly Suboptimal Risk Sharing, Regulating Financial Intermediaries - Challenges and Constraints, Londres, Royaume-Uni

Privately informed owners securitizing assets signal positive information by retaining sufficient interest. Signaling provides social benefits, allowing uninformed investors to insure without fearing adverse selection. Instead of signaling, owners of high value assets may prefer a pooling equilibrium in which they securitize more of the asset, relying on speculators to gather information and bring prices closer to fundamentals. This induces suboptimal risk sharing, since uninformed investors face adverse selection. We analyze privately optimal securitization and the choice between signaling and reliance on speculative markets. In the model, prices are set competitively, with an endogenously informed speculator trading against uninformed hedgers placing rational orders. If a structuring exists providing sufficient speculator gains, her effort is high, mispricing is low, and all/most of the asset is securitized in a pooling equilibrium. Here risky debt and levered equity are optimal, with optimal face value trading off higher unit profits for the speculator against lower hedging demand. Hedgers imperfectly insure, buying only the concave claim, the only source of speculator profits. If risk-aversion is low and/or endowment shocks are small, hedging demand is low, leading to low speculator effort. Here high types sell only safe debt in a separating equilibrium with perfect risk sharing. The owner's incentive to choose the separating equilibrium is weak when risk-aversion is high and/or endowment shocks are large, precisely when efficient risk sharing has high social value.

Chemla G., Hennessy C. (2010), A Theory of Securitization: The Role of Speculative Markets, Corporate Governance Workshop, Toulouse, France

Chemla G., Porchet A., Touzi N., Aïd R. (2009), Forward Hedging and Vertical Integration in Electricity Markets, 36th Annual EFA Meeting, Bergen, Norvège

This paper analyzes the interactions between vertical integration and (wholesale) spot, forward and retail markets in risk management. We develop an equilibrium model that fits electricity markets well. We point out that vertical integration and forward hedging are two separate levers for demand and spot price risk diversification. We show that they are imperfect substitutes as to their impact on retail prices and agents' utility because the asymmetry between upstream and downstream segments. While agents always use the forward market, vertical integration may not arise. In addition, in presence of highly risk averse downstream agents, vertical integration may be a better way to diversify risk than spot, forward and retail mar kets. We illustrate our analysis with data from the French electricity market.

Chemla G., Winter R. (2009), Taxes and Corporate Dynamics: The Product-Market Effect, Seminars in Finance - Stockholm School of Economics, Stockholm, Suède

De Bettignies J-E., Chemla G. (2006), Corporate Venturing, allocation of talent, and competition for star managers, AFFI (Association Française de Finance) :, Paris, France

We provide new rationales for corporate venturing (CV), based on competition for talented managers. As returns to venturing increase, firms engage in CV for reasons other than capturing these returns. First, higher venturing returns increase managerial compensation, to which firms respond by increasing the power of incentives. Managers increase effort, prompting firms to reallocate them to new ventures, where the marginal product of effort is highest. Second, as returns to venturing become large, CV emerges as a way to recruit/retain managers who would otherwise choose alternative employment. We derive several testable empirical predictions about the determinants and structure of CV.

Chemla G. (2004), Optimal Portfolio Diversification and Product-Market Interactions, AFFI 2004 (Association Française de Finance), Paris, France

Although most shareholders hold diversified portfolios, the corporate finance literature postulates that shareholders maximise firm value, while managers sometimes do not. We argue to the contrary that undiversified managers may care more about firm-level risk and return than about the value of their shareholders'diversified portfolio. These two objectives may differ in presence of product-market interactions. We derive a financial and product market equilibrium in presence of a large, diversified investor and a large number of small shareholders. Stock prices, asset allocation and product-market competition all depend on investors'risk-aversion, initial endowment, and industry characteristics. We discuss implications to institutional investor activism, executive compensation contracts, venture capital, and the decision to go public.

Documents de travail

Atanasova C., Chemla G. (2014), Familiarity Breeds Alternative Investment: Evidence from Corporate Defined-Benefit Pension Plans,, 44

We show that corporate R&D intensity and Land and Buildings intensity increase sponsored defined-benefit pension plan investment in private equity and real estate, respectively. Pension funds with such alternative investment tilts underperform significantly, which is inconsistent with plans benefiting from an informational advantage or asset-specific expertise. We find some evidence consistent with the existence of spillovers between pension funds with portfolio tilts and their corporate sponsors. Our results are consistent with theories of familiarity based on ambiguity aversion and on fear of the unknown. This familiarity bias in asset allocation is both robust and economically significant.

Chemla G., Hennessy C. (2011), Privately Versus Publicly Optimal Skin in the Game: Optimal Mechanism and Security Design, CEPR Discussion Paper, 52

We examine screening incentives, welfare and the case for mandatory skin-in-the-game. Ex ante banks can screen, using interim private information to choose retentions and structuring. Ex post speculators trade with rational hedging investors. Absent regulation, there is a separating equilibrium with voluntary retentions. If funding value is high, banks may instead originate-to-distribute (OTD), selling the entire asset in opaque form, deterring informed speculation and destroying screening incentives. Under weaker conditions, banks instead sell the asset in transparent form, using tranching to increase hedging demand, informed speculation and price informativeness. With sufficient informed speculation, transparent OTD actually creates stronger screening incentives than voluntary retentions. In all unregulated market equilibria, interim adverse selection reduces screening incentives, so mandated retentions potentially increase welfare. To induce screening via pooling, banks should be required to retain a uniform junior tranche size which decreases in informational efficiency. However, uniform retention mandates may not be optimal. To improve risk-sharing, screening can instead be induced via separating contracts by compelling banks to choose from a menu of junior tranche retention sizes. In either case, efficiency of risk-sharing is maximized by splitting marketed claims into safe senior and risky mezzanine tranches. Finally, the separating (pooling) regulatory regime generally leads to higher welfare if efficient risk-sharing (bank investment scale) is the dominant consideration, and is always optimal in informationally inefficient markets.

Chemla G., Hennessy C. (2011), Security Design: Signaling Versus Speculative Markets, DISCUSSION PAPER SERIES, Londres, Centre for Economic Policy Research, 60

We determine optimal security design and retention of asset-backed securities by a privately informed issuer with positive NPV uses for immediate cash. In canonical models, investors revert to prior beliefs if issuers pool at zero-retentions (originate-to-distribute), and separating equilibria are welfare-dominated since separation entails signaling via asset-retention and underinvestment. However, we show speculative markets arise if and only if issuers pool, creating previously overlooked costs. Pooling induces socially costly information acquisition by speculators. Further, in pooling equilibria, issuers never sell safe claims, leaving uninformed investors exposed to adverse selection and distorting risk sharing. In such equilibria, issuers retain zero interest in the asset, and speculator effort is maximized by splitting cash flow into a risky senior ("debt") tranche and residual junior ("equity") claim. Optimal leverage trades off per-unit speculator gains against endogenous declines in uninformed debt trading. Issuer incentives to implement the pooling equilibrium, with distorted risk sharing, are strong precisely when efficient risk sharing, achieved through separation, has high social value. In such cases, a tax on issuer proceeds can raise welfare by encouraging issuer retentions. Taxation dominates mandatory skin-in-the-game as a policy response, since the latter creates gratuitous underinvestment.

Chemla G., Hennessy C. (2011), Originate-to-Distribute and Screening Incentives,, Paris, Université Paris-Dauphine, 39

Conventional wisdom holds that lax screening during the subprime boom was the inevitable result of the originate-to-distribute (OTD) business model under which originators retain zero interest in complex tranched securities (CDOs). This has led to calls for originators to maintain more skin-in-the-game (SITG) and curbs on CDOs. We examine these claims in a fully rational model where originators first choose screening effort and then use private information regarding value in deciding between signaling via retentions versus pooling at OTD cum optimally structured CDOs. Contrary to conventional wisdom, we show screening incentives can actually be stronger under OTD, but only if two conditions are met: orginators attach high value to immediate funding and informed trading drives prices sufficiently close to fundamentals. We argue that lax lending standards during the subprime boom can be understood as arising endogenously from insufficient informed trading in CDO markets. Limits on tranched CDOs are shown to be misguided. Tranching creates Arrow securities demanded by hedgers who serve as trading partners for informed speculators who drive prices closer to fundamentals. We also show that screening and no screening by originators can be self-fulfilling prophecies as changes in the probability distribution of CDO quality shift incentives for information acquisition. Finally, we show that bans on shorting alter speculator trading capital needs, decreasing (increasing) the informational efficiency of prices if the unconditional expected quality is high (low).

Atanasova C., Chemla G. (2010), Familiarity Breeds Institutional Investment: Evidence from US Corporate Defined Benefit Pension Plans, Cahiers de la Chaire Finance et Développement Durable, Paris, Université Paris-Dauphine, 31

This paper provides new evidence that familiarity bias affects the portfolios of institutional investors. Using a sample of large US defined-benefit pension plans for the period 1992 to 2002, we show that the corporate focus of the sponsoring firm has an impact on the investment policy of the pension plan. Pension plans sponsored by firms with a high proportion of foreign sales are more likely to invest in international assets, plans sponsored by firms that are active in research and development are more likely to invest in private equity, and plans with sponsors that have more fixed assets are more likely to invest in real estate and mortgages. Comparing to existing explanations of why plans tilt their portfolios towards the sponsor's focus, familiarity bias is the most compelling one. The worse performance of pension plans with such portfolio allocation bias is consistent with pension managers being over-confident about familiar assets.

De bettignies J-E., Chemla G. (2003), Corporate Venture Capital: The Upside of Failure and Competition for Talent, DISCUSSION PAPER SERIES, Londres, Centre for Economic Policy Research, 26

We consider the motives for a firm to engage in corporate venturing. We argue that in case of failure of a new venture, corporate venture capitalists (CVC) have a strategic advantage relative to traditional venture capitalists (VC) in creating rents after rehiring or refinancing the entrepreneurs. Hence, corporate venturing induces the would-be entrepreneur to exert an effort that is higher than within the corporation, but lower than under traditional venture capital financing. Ceteris paribus, the entrepreneur ends up with fewer shares and less control under CVC financing than under traditional VC financing. Competition from venture capitalists increases corporate venturing activity, the salaries of potential entrepreneurs, and total economic output. Our results are consistent with the observed pro-cyclicality of corporate venture capital activity with venture capital activity.

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