DECAMPS Jean Paul

We study the optimal investment policy of a firm facing both technological and cash-flow uncertainty. At any point in time, the firm can decide to invest in a standalone technology or to wait for a technological breakthrough. Breakthroughs occur when market conditions become favorable enough, exceeding a certain threshold value that is ex-ante unknown to the firm. A microfoundation for this assumption is that a breakthrough occurs when the share of the surplus from the new technology accruing to its developer is high enough to cover her privately observed cost. We show that the relevant Markov state variables for the firm's optimal investment policy are the current market conditions and their current historic maximum, and that the firm optimally invests in the stand-alone technology only when market conditions deteriorate enough after reaching a maximum. Empirically, investments in new technologies requiring the active cooperation of developers should thus take place in booms, whereas investments in state-of-the-art technologies should take place in busts. Moreover, the required return for investing in the stand-alone technology is always higher than if this were the only available technology and can take arbitrarily large values following certain histories. Finally, a decrease in development costs, or an increase in the value of the new technology, makes the firm more prone to bear downside risk and to delay investment in the stand-alone technology.

We propose new results on the pricing and hedging of Asian options. In particular, we show that the price of an Asian option is characterized by a partial differential equation with a single state variable. Independently of the numerical interest of such an equation, our approach allows us to obtain new results: i) on the hedging of Asian options . ii) on the comparison between Asian and European options.

Merton (1974) analyses the risk structure of corporate bonds under the assumption of a flat term of interest rates. Wa clarify his results and extend them to the case of stochastic interest. In this case the price of a corporate bond is influences by the forward price of the issuing firm. The objective of the present paper is to account fot this influence. for thaht purpoise it is necessary to deal simultaneously with interest rate risk and with default risk. We demonstrate that several of Merton's conclusions are no longer valid for a stochastic term structure.

A new methodology for the valuation of optional products is introduced based on a variational approach. This approach facilitates: (i) the study of the comparative statistics of the price of option products with respect to the model parameters, (ii) the numerical determination of these prices. The methodology introduced is more particularly applied to private sector coupon bonds that can be valued according to Geske (1977) as option compositions. We show that the valuation formula of Geske (1977) for private sector coupon bonds can be written as a solution to a minimization problem. This allows us to study the behavior of the price of a private sector bond as a function of the volatility of the issuing firm, the amount of the promised coupons, and the maturity of the bond. A study of the spread of a private sector bond is then proposed. It includes, more particularly, an analysis of the variations of the spread according to the distribution of the debt over the maturity of the bond considered. These results are established under the assumption of a flat rate structure. The last part of the work concerns an extension of our methodology to a random curve.

We show that option prices can always be obtained as the values of simple optimization problems. This easy remark has two consuequences : sensitivity analysis is simplified (by applying the envelope theorem) and numerical procedures are improved. We give several examples of applications, in particular to options on portfolios and compound options (or corporate bonds).

We study capital markets in which investors compete by designing financial contracts to control an entrepreneur’s ability to side trade and default on multiple loans. We show that covenants may have anticompetitive effects: in particular, they prevent investors from providing additional funds and reduce the entrepreneur’s investment capacity. As a result, a large number of inefficient allocations is supported at equilibrium. We propose a subsidy mechanism similar to guarantee funds in financial markets that efficiently controls the entrepreneur’s side trading and sustains the competitive allocation as the unique equilibrium one.

We study a credit market in which multiple lenders sequentially offer financing to a single borrower under moral hazard. We show that restricting lenders to post single offers involves a loss of generality: none of the equilibrium outcomes arising in this scenario survives if lenders offer menus of contracts. This result challenges the approach followed in standard models of multiple lending. From a theoretical perspective, we offer new insights on equilibrium robustness in sequential common agency games.

We study a dynamic corporate finance contracting model in which the firm's profitability fluctuates and is impacted by the unobservable managerial effort. Thereby, we introduce in an agency framework the issue of strategic liquidation. We show that the principal's problem takes the form of a two-dimensional fully degenerate Markov control problem. We prove regularity properties of the value function and derive explicitly the optimal contract that implements full effort. Our regularity results appear in some recent studies, but with heuristic proofs that do not clarify the importance of the regularity of the value function at the boundaries.

We model the financing, cash holdings, and hedging policies of a firm facing financing frictions and subject to permanent and transitory cash flow shocks. The permanent and transitory shocks generate distinct, sometimes opposite, effects on corporate policies. We use the model to develop a rich set of empirical predictions. In our model, correlated permanent and transitory shocks imply less risk, lower cash savings, and a drop in the value of credit lines. The composition of cash-flow shocks affects the cash-flow sensitivity of cash, which can be positive or negative. Optimal hedging of permanent and transitory shocks may involve opposite positions.

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We conduct a series of experiments that simulate trading in financial markets. We find that the information content of the order flow varies with the strength of subjects' prior beliefs about fundamentals. The presence of intrinsic uncertainty about the asset's fundamentals reduces informational efficiency. This originates from subjects' risk attitudes and biases in the way some subjects update their beliefs. The behavior of approximately 63% of the subjects is consistent with the expected utility maximization. These subjects are either risk averse (52%) or risk loving (11%). About 22% of the subjects display non-Bayesian updating of beliefs: underconfidence emerges for weak prior beliefs, and confirmation bias occurs for strong prior beliefs. Non-Bayesian belief updating reduces market efficiency when subjects' prior beliefs are weak and increases it when the prior beliefs are strong.

We study competition in capital markets subject to moral hazard when investors cannot prevent side trading. Perfect competition is impeded by entrepreneurs’ threat to borrow excessively from multiple lenders and to shirk. As a consequence, investors earn positive rents at equilibrium. We then analyze how investors’ ability to design financial contracts with covenants deals with this counterparty externality. We show that enlarging investors’ contracting opportunities generates a severe market failure: with covenants, market equilibria are indeterminate and Pareto ranked. Market outcomes are then determined by designing specific financial institutions. Information sharing systems restore efficiency but leave a positive rent to investors. A mechanism of investors-financed subsidies to entrepreneurs mitigates the threat of default and sustains the competitive allocation.

This thesis is composed of three essays. The first essay deals with the problem of the risk of extreme losses in the banking sector in the context of the agency problem between the shareholders and the top managers of banks. In order to induce banks not to take the risk of extreme losses, it is proposed to apply capital regulation in the form of a mandatory recapitalization policy, the parameters of which are chosen to induce shareholders to remunerate their managers in such a way as to steer them away from extreme loss strategies.The 2nd essay develops the design of bank supervision that aims to eliminate the moral hazard problem within a bank, while ensuring a minimum cost of supervision. Banks, whose financial condition begins to deteriorate, should be subject to random audits. Banks whose asset values have deteriorated significantly should be placed under conservatorship for financial recovery. External auditors can be involved in the supervisory process, but should not completely replace regulators. The third essay studies how the borrowing capacity of the non-financial firm affects its investment policy in the presence of debt issuance costs. It is shown that firms, with medium borrowing capacity, have an incentive to make a larger investment compared to firms with relatively low/high borrowing capacity. This is entirely due to the effect of fixed debt issuance costs, which emerges in the dynamic investment environment.

The thesis confronts decision theories used in economics and cognitive and social psychology and discusses their implication on the informational efficiency of financial markets. The first part presents the functioning of Bayesian learning models and more specifically of herd behavior. The second part provides an introduction to cognitive psychology and behavioral economics and finance. The third part deals with theoretical models of behavioral finance that introduce a cognitive bias in economic agents that distorts their rationality. An original model of belief discounting is proposed that conditions an information processing process on the nature of the information disseminated on the markets.

The modeling of bond prices is the subject of this thesis. Our results concern two types of problems: (i) the valuation of bonds in the framework of Gaussian general equilibrium models. (ii) the valuation of private sector bonds in the framework of arbitrage pricing models. The four chapters of the paper lead us to: (i) establish new formulas for the valuation of bond products, (ii) analyze simultaneously the issuer's default risk and the interest rate risk, (iii) introduce a new methodology for the valuation of optionals based on a variational approach, (iv) study empirically the price of private sector bonds