| Research Abstract |
This study develops a framework for analyzing a problem of security design in the presence of monitoring done by a large investor to discipline the management of a firm. Since the large investor enjoys only a part of the benefits brought about by her monitoring activities but incurs all the associated costs, she needs to structure the. problem of security design to motivate herself to make an efficient level of monitoring if she cannot be committed to any prior levels of monitoring before she designs and issues the security. In fact, it is costly to design and issue the security to attain an efficient level of monitoring because of both the direct effect on the ex ante payoff of the large investor and the indirect effect on her ex ante payoff through a change in the security price. By assuming that the large investor takes account of the effect on her sales revenues of the amount of security issued, this research shows that the optimal security is a debt-like security such as standard debt with a positive probability of default, or debt with call, options in the presence of the monitoring problem. Furthermore, this study also examines a stylized model in which different combinations of corporate governance structures and employment contracts continue to be stable for different parameter values of the environment, In the presence of complementarity relations between financial and labor systems, this research shows that two equilibria coexist : one is a combination of market-oriented financial and labor systems, whereas the other is a combination of the main bank and long-term employment systems. To discuss which equilibrium is more plausible for different parameter values of the environment, this study exploits the evolutionary approach to equilibrium selection.
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