Dan Luo

PhD Student, Finance
PhD Program Office Graduate School of Business Stanford University 655 Knight Way Stanford, CA 94305

Dan Luo

I am currently a finance Ph.D. student at Stanford Graduate School of Business. I am interested in microeconomic theory and corporate finance, especially multi-agent design problems. I will be on the market this year.

Job Market Paper

Projects and firms are commonly financed by investor syndicates. I study how investors in syndicates acquire and share information and solve the entrepreneur's financial contracting problem. The key mechanism is that investors share information through strategic communication. Contracts determine whether investors' interests are aligned or divergent and further how they communicate strategically. When projects have high ex ante profitability, optimal contracts employ hierarchical structures to differentiate investors, create conflicts of interest, and impede information sharing. When projects have low ex ante profitability, optimal contracts employ flat structures to homogenize investors, align their interests, and facilitate information sharing. This pattern of syndicate structures and their underlying logic are consistent with empirical observations. Welfare analysis implies that allowing strategic communication in syndicates is socially preferred in many cases.

Working Papers

Disclosure of Bank-specific Information and Stability of Financial Systems (with Liang Dai and Ming Yang)

We show that disclosures of bank-specific information can stabilize financial systems by reallocating systemic risk across banks. Such disclosures differentiate banks in their resilience to adverse shocks, and shift systemic risk from weak banks to strong ones. Yet, only disclosures about banks' loadings on systemic risk can mitigate systemic bank runs, because they shift systemic risk from banks more vulnerable to it to those less vulnerable. An optimal disclosure thus maximally differentiates banks in such loadings, provided that they are run simultaneously if inevitable. Disclosures of banks' idiosyncratic shocks do not differentiate banks like that, rendering the resulting reallocation of systemic risk inconducive to mitigating systemic bank runs.

A Dynamic Delegated Investment Model of SPACs (with Jian Sun)

We study SPACs in a continuous-time delegated investment model. Our model is built upon three unique features of SPACs: the sponsor and the investor are only partially aligned, a SPAC has a short time horizon, and the investor has the final control over investment approval. Due to the misalignment in incentives, the sponsor has an increasing incentive to propose unprofitable projects to the investor; in response, the investor exerts more stringent screening based on her information. Although the screening helps curb the sponsor’s moral hazard, it also dampens the disciplining effect of partial alignment in incentives. When the investor’s information is sufficiently noisy, the second effect dominates, so giving the investor control over investment approval reduces everyone’s welfare. This adverse effect is more pronounced if entrepreneurs’ strategic choices of SPAC or the sponsor’s strategic choice of effort are considered. We find that introducing public assessment and making the investor’s control right contingent on it may benefit both parties. We also explore whether a SPAC should be allowed to continue after the current project is disapproved by the investor.

Moral Hazard and Corporate Information Environment

Much of corporate managers’ incentive is related to the stock price, so a firm can design the corporate information environment to tackle its manager’s moral hazard problem. We analyze a model in which the manager needs to exert costly effort to start a risky, long-term project and the project gives the manager opportunities to make credible disclosure. The optimal disclosure to motivate effort is the manager’s strategic disclosure because it protects the manager from the downside of the project and induces the rational stock market to punish nondisclosure. A more transparent information regime is not always preferred because it may reduce the manager’s discretion on disclosure. We also derive the optimal disclosure when both the effort and the project choice are considered.

Coordination Based Contract Design

A principal owns a project whose value depends on the state and agents' participation. To motivate agents' participation, the principal offers contracts backed by the project value. Miscoordination arises because agents observe only noisy signals about the state. We study the principal's optimal contract design in this coordination game with incomplete information. We find that the impact of miscoordination is the product of agents' perception of miscoordination and their payoff sensitivity to miscoordination. To minimize the product, the principal should differentiate agents in both dimensions and match them properly. Consequently, the optimal contract contains a tranching structure in which senior-tranche holders, who are more robust to miscoordination, bear more miscoordination and help alleviate junior-tranche holders’ fear of miscoordination. Our analysis highlights the role of differentiating agents' payoff structures in mitigating miscoordination.