Artur Raviv

Raviv, Artur and Milton Harris. 2014. How to Get Banks to Take Less Risk and Disclose Bad News. Journal of Financial Intermediation. 23: 437–470.

There is wide agreement that before the recent financial crisis, financial institutions took excessive risk in their investment strategies. At the same time, regulators complained that banks did not reveal the extent of their difficulties in a timely fashion thus reducing the effectiveness of government intervention to prevent or mitigate the deleterious effects of the financial crisis. The purpose of this paper is to investigate how regulators can best use certain tools at their disposal to motivate banks to take less risk and to provide adverse information to regulators early. We argue that two tools, namely restricting bank payouts to equity holders when banks report they are in trouble and constraining banks’ future investment strategy when they are in trouble can achieve both goals. We show that, in some cases, optimal use of these tools involves allowing equity payouts, even though these payments are financed by taxpayers. We also show that the more socially costly is constraining the bank’s portfolio selection or the more complex are the bank’s assets, the more likely it is that allowing larger payouts and fewer constraints is optimal.

Harris, Milton, Charles H. Kriebel and Artur Raviv. 1982. Asymmetric Information, Incentives and Intrafirm Resource Allocation. Management Science. 28(6): 609-620.

This paper considers the question: How should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager? Obviously if the divisions (as represented by their managers) are indifferent among various allocations of the resource, the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie. The resource allocation problem can then be solved under complete (or at least symmetric) information. This aspect is a flaw in much of the recent literature on this topic, i.e., there is nothing in the models considered which makes divisions prefer one allocation over another. Thus, although in some cases elaborate allocation schemes are proposed and analyzed, they are really unnecessary. In the model we develop, a division can produce the same output with less managerial effort if it is allocated more resources, and effort is costly to the manager. We further assume that this effort is unobservable by the headquarters, so that it cannot infer divisional productivity from data on divisional output and managerial effort. Given these assumptions, we seek an optimal resource allocation process. Our results show that certain types of transfer pricing schemes are optimal. In particular, if there are no potentially binding capacity constraints on production of the resource, then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters. Division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price. Resources are allocated on the basis of the chosen transfer prices. If there is a potentially binding constraint on resource production, a somewhat more complicated, but similar, scheme is required.

Raviv, Artur, Rod N. Feuer, Parth Mehrotra and Peter Rossmann. 2008. Maytag: Takeover Strategies. Case 5-208-258 (KEL382).

On April 22, 2005, Maytag Corporation’s stock price fell 28 percent after the company reported disappointing first-quarter results and significantly reduced its earnings outlook for 2005. The company’s sales were declining due to increased foreign competition and its production costs were increasing due to higher energy, materials, and distribution costs. Maytag’s management and board clearly understood the need to make strategic decisions to turn around the fate of their company. Maytag could propose a drastic turnaround plan and remain independent, sell itself to either a large domestic competitor such as Whirlpool or a foreign firm such as Haier, or it could choose to go private by selling to a financial buyer (Ripplewood).

Raviv, Artur, Jan Henrich and Gero Steinroeder. 2003. Energy Gel: A New Product Introduction (A). Case 5-403-756(A) (KEL083).

This case involves an analysis of the decision regarding a new product introduction. The main issues for discussion are: sunk costs, incremental costs, cannibalization, shared facilities, and the treatment of inflation.

Raviv, Artur, Timothy Thompson, Phillip Gresh and Shannon Hennessy. 2004. Bed Bath & Beyond: The Capital Structure Decision. Case 5-204-270 (KEL082).

Bed Bath & Beyond (BBBY) had no long-term debt on its balance sheet. Although many analysts considered BBBY’s balance sheet a strength that permitted greater flexibility, some commented on the risks of its growing cash balance. These concerns raised questions about BBBY’s capital structure. In early 2004, interest rates were at an all-time low, making it an attractive time to consider issuing debt and executing either a share repurchase or a one-time special dividend. This case provides a few capital structure proposals and students are asked to analyze those proposals.

Raviv, Artur and Milton Harris. 2014. How to Get Banks to Take Less Risk and Disclose Bad News. Journal of Financial Intermediation. 23: 437–470.

There is wide agreement that before the recent financial crisis, financial institutions took excessive risk in their investment strategies. At the same time, regulators complained that banks did not reveal the extent of their difficulties in a timely fashion thus reducing the effectiveness of government intervention to prevent or mitigate the deleterious effects of the financial crisis. The purpose of this paper is to investigate how regulators can best use certain tools at their disposal to motivate banks to take less risk and to provide adverse information to regulators early. We argue that two tools, namely restricting bank payouts to equity holders when banks report they are in trouble and constraining banks’ future investment strategy when they are in trouble can achieve both goals. We show that, in some cases, optimal use of these tools involves allowing equity payouts, even though these payments are financed by taxpayers. We also show that the more socially costly is constraining the bank’s portfolio selection or the more complex are the bank’s assets, the more likely it is that allowing larger payouts and fewer constraints is optimal.

Harris, Milton, Charles H. Kriebel and Artur Raviv. 1982. Asymmetric Information, Incentives and Intrafirm Resource Allocation. Management Science. 28(6): 609-620.

This paper considers the question: How should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager? Obviously if the divisions (as represented by their managers) are indifferent among various allocations of the resource, the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie. The resource allocation problem can then be solved under complete (or at least symmetric) information. This aspect is a flaw in much of the recent literature on this topic, i.e., there is nothing in the models considered which makes divisions prefer one allocation over another. Thus, although in some cases elaborate allocation schemes are proposed and analyzed, they are really unnecessary. In the model we develop, a division can produce the same output with less managerial effort if it is allocated more resources, and effort is costly to the manager. We further assume that this effort is unobservable by the headquarters, so that it cannot infer divisional productivity from data on divisional output and managerial effort. Given these assumptions, we seek an optimal resource allocation process. Our results show that certain types of transfer pricing schemes are optimal. In particular, if there are no potentially binding capacity constraints on production of the resource, then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters. Division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price. Resources are allocated on the basis of the chosen transfer prices. If there is a potentially binding constraint on resource production, a somewhat more complicated, but similar, scheme is required.

Raviv, Artur, Rod N. Feuer, Parth Mehrotra and Peter Rossmann. 2008. Maytag: Takeover Strategies. Case 5-208-258 (KEL382).

On April 22, 2005, Maytag Corporation’s stock price fell 28 percent after the company reported disappointing first-quarter results and significantly reduced its earnings outlook for 2005. The company’s sales were declining due to increased foreign competition and its production costs were increasing due to higher energy, materials, and distribution costs. Maytag’s management and board clearly understood the need to make strategic decisions to turn around the fate of their company. Maytag could propose a drastic turnaround plan and remain independent, sell itself to either a large domestic competitor such as Whirlpool or a foreign firm such as Haier, or it could choose to go private by selling to a financial buyer (Ripplewood).

Raviv, Artur, Jan Henrich and Gero Steinroeder. 2003. Energy Gel: A New Product Introduction (A). Case 5-403-756(A) (KEL083).

This case involves an analysis of the decision regarding a new product introduction. The main issues for discussion are: sunk costs, incremental costs, cannibalization, shared facilities, and the treatment of inflation.

Raviv, Artur, Timothy Thompson, Phillip Gresh and Shannon Hennessy. 2004. Bed Bath & Beyond: The Capital Structure Decision. Case 5-204-270 (KEL082).

Bed Bath & Beyond (BBBY) had no long-term debt on its balance sheet. Although many analysts considered BBBY’s balance sheet a strength that permitted greater flexibility, some commented on the risks of its growing cash balance. These concerns raised questions about BBBY’s capital structure. In early 2004, interest rates were at an all-time low, making it an attractive time to consider issuing debt and executing either a share repurchase or a one-time special dividend. This case provides a few capital structure proposals and students are asked to analyze those proposals.