2008 Headlines
Yaniv Grinstein Awarded Best Paper Prize From the Journal of Financial Intermediation
January 11, 2008 | Ithaca, NY | The Johnson School at Cornell University announces Yaniv Grinstein, assistant professor of finance, was awarded the Best Paper Prize for the most significant paper published in the Journal of Financial Intermediation in 2006 for his paper, "The Disciplinary Role of Debt and Equity Contracts: Theory and Tests." The article studies how debt and equity should be designed to align managerial incentives. Both debt and equity have features that create incentives for management to work hard. Debt holders' right to cease assets if they do not get their money back and equity holders' right to replace the manager if they do not get a reasonable return creates very powerful incentives.
"What's interesting about debt and equity is that their terms can be changed to create more powerful or less powerful incentives," comments Grinstein. "A debt contract with lenient terms and longer maturity does not provide as powerful incentives as a debt contract with stricter terms and shorter maturity. Similarly, a large number of equity holders who each hold only a small stake in the firm will have less power to replace the CEO than few strong equity holders with a large stake."
The model shows that, to provide the right incentives, both debt and equity are necessary in the capital structure, but that firms should choose either to provide incentives with strict debt terms or with strong equity holders. Having both strict terms and strong equity holders at once is suboptimal because it distorts incentives to discipline. The model has additional predictions on the determinants of the choice between strict debt terms and strong shareholders and the effect of other alignment mechanisms (such as managerial equity holdings or compensation contracts) on the results. The paper finds supportive evidence for the model's predictions in a sample of leveraged buyout transactions.
The Journal of Financial Intermediation editors cast votes to select the Best Paper Prize from all papers published in the journal during the year. The prize includes a $2,500 check, which will be presented to Grinstein during the Financial Intermediation Research Society conference in June.
Grinstein's research and teaching interests are in corporate finance and corporate governance. His current research focuses on the effect of governance regulations on firm policies, optimal executive compensation arrangements, and the determinants of board structure. Between 2006 and 2007, he worked at the Securities and Exchange Commission, continuing his research efforts in these areas. He has published in several journals in the areas of corporate governance, capital structure, and dividend policy, including the Journal of Finance, the Journal of Financial Economics, the Journal of Financial Intermediation and others. His research has been widely cited in major newspapers such as The Economist, Financial Times, Newsweek, New York Times, Los Angeles Times, Forbes magazine, Time magazine, Washington Post, as well as in Congressional hearings on the new governance rules. He is the recipient of the Best Paper in Corporate Finance Award from the Southwestern Finance Association in 2005, and of the Clifford H. Whitcomb faculty fellowship in 2004-2005.
