This paper studies mergers between competing firms and shows that while such mergers reduce the level of product market competition, they may have an adverse effect on employee incentives to innovate. In industries where value creation depends on innovation and development of new products,...

We take a portfolio approach to analyze the investment strategy of a venture capitalist (VC) and show that portfolio size and scope affect both the entrepreneurs' and the VC's incentives to exert effort. A small portfolio improves entrepreneurial incentives because it allows the VC to...

We analyze the optimality of allowing disclosures of different types of information before equity offerings and of alternative rules for private securities litigation, where courts may penalize unduly optimistic disclosures ex post. In our model, firm insiders, with private information about...

We propose a new theory of systemic risk based on Knightian uncertainty (or "ambiguity"). We show that, due to uncertainty aversion, beliefs on future asset returns are endogenous, and bad news on one asset class induces investors to be more pessimistic about other asset classes as well. This...

We study a multidivisional firm where headquarters are exposed to moral hazard by division managers under uncertainty (or "ambiguity") aversion. We show the aggregation and linearity results of Holmström and Milgrom (1987) hold in an environment with IID ambiguity, as in Chen and Epstein...

We develop a theory of innovation waves, investor sentiment, and merger activity based on Knightian uncertainty. Uncertainty-averse investors are more optimistic on an innovation when they can make contemporaneous investments in multiple uncertain projects. Innovation waves occur when there is a...

We study the classical problem of raising capital under asymmetric information. Following Myers and Majluf (1984), we consider firms endowed with assets in place and riskier growth opportunities. When asymmetric information is concentrated on assets in place (rather than growth opportunities),...

This paper investigates the optimal size and scope of a Venture Capitalist's (VC's) portfolio. We consider a VC who chooses the number of start-ups to invest in his portfolio. In our model, both the VC's and the entrepreneurs' inputs are necessary for the success of the project, making their...

This paper investigates the optimal size and scope of a Venture Capitalist's (VC's) portfolio. We consider a VC who chooses the number of start-ups to invest in his portfolio. In our model, both the VC's and the entrepreneurs' inputs are necessary for the success of the project, making their...

This paper develops a theory of the organization and financing of innovation activities where integration, venture capital financing, and strategic alliances emerge as optimal responses to competitive pressures of the Ramp;D race, research intensity of Ramp;D projects, the stage of the research...