ABSTRACT I develop a structural model to quantify the costs of tax avoidance. In model, firm trades off savings with audit risk, financial reporting considerations, and operational frictions imposed by avoidance, last which label as nontax costs. The estimated parameters suggest costs, are difficult observe, decrease pretax income 6.4 percent or $58 million per firm-year. large magnitude this e...

In this paper the problem of optimal derivative design, profit maximization and risk minimization under adverse selection when multiple agencies compete for the business of a continuum of heterogenous agents is studied. In contrast with the principal–agent models that are extended within, here the presence of ties in the agents’ best–response correspondences yields discontinuous payoff function...

We examine the role of information-based stock trading in affecting the risk-incentive relation. By incorporating an endogenous informed trading into an optimal incentive contracting model, we analytically show that, apart from reducing incentives, a greater risk increases the level of information-based trading which consequently enhances executive incentives and offsets the negative risk-incen...

Assumptions about the dynamic and distributional behavior of risk factors are crucial for the construction of optimal portfolios and for risk assessment. Although asset returns are generally characterized by conditionally varying volatilities and fat tails, the normal distribution with constant variance continues to be the standard framework in portfolio management. Here we propose a practical ...

We provide several generalizations of Mailath’s (1987) result that in games of asymmetric information with a continuum of types incentive compatibility plus separation implies differentiability of the informed agent’s strategy. The new results extend the theory to classic models in finance such as Leland and Pyle (1977), Glosten (1989), and DeMarzo and Duffie (1999), that were not previously co...

We explore what group reputation is and model its formation and evolution. We define a player’s group reputation as the belief others have about the characteristics of the group he belongs to, which is based only on group signals. A player’s individual reputation is derived from his group reputation by adding individual signals. A model of group reputation of civil servants is constructed to id...

For determining the expected return, and asset pricing, CAPM (Capital pricing model) is being used dominantly grounded on only market (systematic) risk-factor though several anomalies have been revealed in this model. Fama French (1993) addressed those developed Three-factor model by combining size value factors besides factors. Over time, Carhart (1997) has further a addressing momentum factor...

Credit default swaps (CDS) are similar to out-of-the-money put options in that both offer a low cost and effective protection against downside risk. This study investigates whether put optionimplied volatility is an important determinant of CDS spreads. Using a large sample of firms with both CDS and options data, we find that individual firms’ put option-implied volatility dominates historical...

We propose an equilibrium model to study the impact of short-sale constraints on market prices and liquidity in imperfectly competitive markets where market makers have significant market power and are averse to inventory risk. We show that shortsale constraints decrease bid because of the market power and increase ask because of the risk aversion. Our model can therefore help explain why short...

In an asset-pricing model, risk-averse agents need to forecast the conditional variance of a stock’s return. A near-rational restricted perceptions equilibrium exists in which agents believe prices follow a random walk with a conditional variance that is self-fulfilling. When agents estimate risk in realtime, recurrent bubbles and crashes can arise. These effects are stronger when agents allow ...