We present a model of flight to quality episodes that emphasizes financial system risk and the Knightian uncertainty surrounding these episodes. In the model, agents are uncertain about the probability distribution of shocks in markets different from theirs, treating such uncertainty as Knightian. Aversion to this uncertainty generates demand for safe financial claims. It also leads agents to r...

We show that investors derive utility from non-pecuniary characteristics of investments by studying impact funds, defined as venture or growth equity funds with dual objectives of generating financial returns and positive externalities. Impact funds earn internal rates of return that are 4.7% less than traditional VC funds in reduced form regressions. Based on estimates of a willingness to pay ...

Employing compensation data provided by 63 banks from 16 European countries for the period from 2000 to 2010 this paper empirically investigates the impact of excess variable compensation on bank risk. As a main finding, we provide evidence for a risk-increasing impact of excess variable pay for both executive variable cash-based and variable equity-based compensation. This baseline finding hol...

Many U.S. states imposed temporary moratoria on farm and nonfarm residential mortgage foreclosures during the Great Depression. This article describes the conditions that led some states to impose these moratoria and other mortgage relief during the Depression and discusses the economic effects. Moratoria were more common in states with large farm populations (as a percentage of total state pop...

The paper shows how excessive reporting, called “crying wolf”, can dilute the information value of reports. Excessive reporting is investigated by undertaking the first formal analysis of money laundering enforcement. Banks monitor transactions and report suspicious activity to government agencies, which use these reports to identify investigation targets. Banks face fines should they fail to r...

Failure in bank corporate governance has been seen as a contributing factor to excessive risk-taking pre-crisis with devastating implications as risks realised during the financial crisis. Unfortunately, the empirical evidence on the impact of managerial incentives on bank crisis performance is scarce. Moreover, bank strategy has not previously been accounted for. Hence, this paper presents nov...

In this paper we develop a two-step survival time approach – a discrete logit model with survival time dummies – that allows for time-varying explanatory variables and interval censored data. Our empirical analysis reveals that the twostep approach outperforms the benchmark logit model with respect to out-ofsample prediction accuracy. Survival time, however, does not play an important role. The...

We develop a model of financial intermediation characterized by an inside agency problem such that asset managers, when they have access to high enough liquidity, “reach for yield” by overinvesting in risky assets and concurrently underinvesting in safer or medium-risk assets. The managers follow a pecking order whereby their first preference is to invest in risky assets; their second preferenc...

We establish a fundamental relationship between the return on the banking sector’s assets and each banker’s willingness to supply liabilities that facilitate payments and settlement (private money). In particular, we show that the regulation of lending practices is necessary for the optimal provision of private money. In an environment in which bankers cannot commit to their promises, an unregu...

This paper adopts a contingent-claim valuation framework to investigate the role of subordinated debt in alleviating the moral hazard problem in banking and providing the regulator with the information on the risk of bank assets. The incorporation of bankruptcy cost in the framework of the analysis provides some new evidence about the potential role of subordinated debt. The extent of market di...