Three Essays on Information Efficiency in Financial Markets and Product Market Interaction.

Summary This thesis contains three independent papers. The first two examine the informational role of stock prices and its impact on the real economy. The last one explores the relationship between incentive management and competition in the product market. In the first paper, two firms compete in a product market and have the opportunity to invest in a risky technology. A firm may choose to invest earlier or later, when stock prices reveal the value of the technology. Information leakage thus introduces a waiting option, which improves production efficiency. A potential leader may nevertheless be discouraged from investing early, when anticipating his competitor to invest later in response to good news. I show that increasing product market competition increases the value of the option to wait, but has an ambiguous effect on information production. It may therefore be that intense competition leads to more leakage so that no firm will invest, especially in a small market. Given a moderate level of competition, the informative price may improve investment outcomes when the profitability of the investment and the size of the market are relatively large. The second article examines the feedback effect of certifications on financial markets. A firm must decide whether to verify the inside of a potential investment prospect or to delegate this task to a certifier who reveals his valuations to outsiders. The investment decision is then made on the basis of all available market information. The information asymmetry between the firm and the lenders is mitigated by delegation, and thus the firm benefits from a lower cost of capital. Delegation, however, reduces the information advantage of speculators who make less effort to obtain information. This results in a potential "crowding-out" effect of information. We show that the firm may prefer to delegate when the a priori belief about the investment prospect is relatively high, and to choose internally to produce information when its own signal is more accurate and when its current assets in place generate a higher expected payoff. The third paper considers a model of spatial competition with horizontal and vertical differentiation. Two firms are assigned to exogenous locations on a circular city. Consumers, distributed over the circle, must pay a transportation fee to purchase. Anticipating a future uncertainty in product quality, the firms simultaneously offer incentive contracts to managers to induce an optimal level of effort. I show that competition can negatively affect incentives, such as a lower transportation cost affects the firm's local market power and reduces a firm's marginal profit from producing a high quality product, especially when its competitor also produces a high quality product. On the other hand, greater competition reduces a firm's profit if it fails to improve product quality. This effect increases the optimal level of effort, and it becomes dominant if the quality improvement is relatively large compared to the cost of the effort. In addition, a large decrease in the cost of transportation can change the market structure, so that the firm with better quality goods attracts all the demand, and thus the positive effect of competition on management activity becomes more important.