FRIC/Finance Seminar with Konstantin W. Milbradt, Northwestern University
The Department of Finance and FRIC, Center for Financial Frictions, are proud to announce the upcoming seminar with Konstantin W. Milbradt, Kellogg School of Management, Northwestern University.
Konstantin W. Milbradt will present:
We present a model of liquidity management and ﬁnancing decisions under moral hazard in which a ﬁrm accumulates cash to forestall liquidity default. When the cash balance is high, a tension arises between accumulating more cash to reduce the probability of default and providing incentives for the manager. When the cash balance is low, the ﬁrm hedges against liquidity default by transferring cash ﬂow risk to the manager via high powered incentives. Under mild moral hazard, ﬁrms with more volatile cash ﬂows tend to transfer less risk to the manager and hold more cash. In contrast, under severe moral hazard, an increase in cash-ﬂow volatility exacerbates agency cost, thereby reducing ﬁrm value, overall hedging and in particular precautionary cash-holdings. Agency conﬂicts lead to endogenous, state-dependent reﬁnancing costs related to the severity of the moral hazard problem. Financially constrained ﬁrms pay low wages and instead promise the manager large rewards in case of successful reﬁnancing.
Solbjerg Plads 3,