Joanne (Juan) Chen
Abstract: I develop a dynamic agency model to investigate optimal managerial authority and its interaction with managerial compensation. The model shows that when hiring a manager, the principal delegates authority that is unresponsive to either the manager's outside options or the firm's recruitment costs, in contrast to promised compensation, which increases in both. Over time, both the manager's authority and his compensation rise after good performances and decline after bad realizations. Authority-performance sensitivity decreases as the manager's authority grows, resembling entrenchment. In contrast, pay-performance sensitivity increases with the manager's authority. If managerial authority can be adjusted only infrequently, the optimal contract may allow for self-dealing. Moreover, the model reveals that early-career luck plays a disproportionate role in determining the manager's authority and lifetime utility.
Presentations: BU Economics (scheduled), Finance Theory Webinar, NFA 2022, Cambridge Corporate Finance Theory Symposium 2022, Finance Theory Group Summer Meeting 2022, SFS Cavalcade North America 2022, FMCG PhD Symposium, Queen Mary University of London, Northwestern University (Kellogg), UNC-Chapel Hill (Kenan-Flagler), Erasmus University Rotterdam, Boston University (Questrom), UT Dallas (Naveen Jindal), Warwick Business School, Copenhagen Business School, Shanghai Advanced Institute of Finance, University of Amsterdam, EWMES 2021, Toulouse School of Economics, EFA Doctoral Tutorial 2021, World Finance Conference 2021, LSE
Abstract: I develop a tractable micro-founded dynamic platform model featuring cross-group network effects. Networks are analogous to capital assets, and the platform enterprise invests in the networks by making subsidies to users. The paper characterizes the entrepreneur's optimal financing and investment strategies. The main findings are: 1) making highly aggressive subsidies by using up available funds is optimal; 2) per-transaction subsidies decrease as the network grows; 3) the platform with stronger network effects has a propensity to make more subsidies at initial stages; 4) staged financing mitigates the limited enforcement problem, and ceteris paribus, the number of funding rounds decreases with the profitability of the platform and increases with required profits by financiers; 5) the value of funds raised each round increases and the financing frequency decreases over time.
Presentations: Owners as Strategists Conference 2022 (Virtual), FMA 2020 (Virtual), AFA poster 2020 (San Diego), KWC Conference in Entrepreneurial Finance (Sweden), LSE
Work in Progress
Corporate Governance Time Bombs, with Martin Oehmke (Draft available upon request)
Why are “corporate time bombs’’ (festering problems that can lead to extreme losses for a firm) often kept unsolved? We show that, if the manager’s tenure is uncertain, it can be optimal to provide only low-powered incentives to diffuse corporate time bombs, so that procrastination is a rational response. If the problem remains unsolved after the incumbent manager’s departure, incentives given to successive managers to diffuse the time bomb are even lower, due to the principal’s belief updating. The model implies that time bombs have to be diffused within a certain time frame and shows that frequent managerial turnover leads to missed opportunities for solving the problem.
Lecturer: FE449 Corporate Financial Management (Fall 2022)
London School of Economics (2016-2022):
Class Teacher: FM250 Finance Evaluations (Benchmark for excellence: 4.2/5.0)
Class Teacher: FM101 Finance Evaluations
Class Teacher: FM212 Principles of Finance Evaluations (Scale from 1 to 5, with 1.0 highest)
Teaching Assistant: FM421 Applied Corporate Finance
Teaching Assistant: FM422 Corporate Finance
Teaching Assistant: FM445 Portfolio Management
Foundation-controlled Firms and CEO Compensation
Raising Capital under Demand Uncertainty