We study how equity and debt contracts commit investors to discipline managers. Our model shows that the optimal allocation of debt, equity, and control rights depends on which disciplinary action is more efficient. When the efficient action is managerial replacement, then control rights should be allocated to equity holders, and capital structure should consist of equity and long-term debt. Wh...

We study a novel aspect of a firm’s capital structure, namely the profile of its debt maturity dates. In a simple theoretical framework we show that the dispersion of debt maturities constitutes an important dimension of capital structure choice, driven by firm characteristics and debt rollover risk. Guided by these results we establish two main empirical results. First, using an exogenous shoc...

It is typically less profitable for an opportunistic borrower to divert inputs than to divert cash. Therefore, suppliers may lend more liberally than banks. This simple argument is at the core of our contract theoretic model of trade credit in competitive markets. The model implies that trade credit and bank credit can be either complements or substitutes. Among other things, the model explains...

This paper identifies the entrepreneur’s exposure to idiosyncratic risk as an important determinant of the demand for loans and the capital structure. The analysis is based on a sample of small and medium-sized private companies from the United States. The exposure to idiosyncratic risk is approximated by the share of personal net worth invested in one company (SNWI). Exposure to idiosyncratic ...

I explore the role of the Just-in-Time (JIT) inventory system in the increase of cash holdings among U.S. manufacturing firms. I first demonstrate the empirical importance of JIT in shaping cash policy. I then develop a model to analyze the mechanism through which JIT affects cash and quantify its impact. In the model, both cash and inventory can serve as working capital. As firms switch from t...

Open-market repurchases reduce the supply of a stock’s shares in the market. Japanese stock repurchase data allows us to successfully isolate the supply effect from information effects of the stock repurchase. We focus on stock price behavior during the actual repurchase period when no new information is released and find that the excess stock returns are significantly positive only during actu...

This paper analyzes the wealth and risk incentive effects of managerial options and shareholdings on the hedging probability of UK listed Alternative Investment Market (AIM) companies. We find that the wealth incentive effect provided by managerial option holdings increases the hedging likelihood. On the contrary, the wealth incentive effect provided by managerial shareholdings decreases the he...

We analyze debt choice in light of taxes and moral hazard. The model features an infinite sequence of nonzero-sum stochastic differential games between equity and debt. Closed-form expressions are derived for all contingent-claims. If equity can increase volatility without reducing asset drift, callable bonds with call premia are optimal. Although callable bonds induce risk shifting, call premi...

This paper presents an industry equilibrium model where firms can choose to engage in corporate social responsibility (CSR) activities. We model CSR activities as an investment in customer loyalty and show that CSR decreases systematic risk. This e§ect is stronger for firms producing di§erentiated goods and when consumers’ expenditure share on CSR goods is small. We find supporting evidence for...

Paralleling regulatory developments, we devise value-at-risk and expected shortfall type risk measures for the potential losses arising from using misspecified models when pricing and hedging contingent claims. Essentially, losses from model risk correspond to losses realized on a perfectly hedged position. Model uncertainty is expressed by a set of pricing models, relative to which potential l...