Learn More
The MIT Faculty has made this article openly available. Please share how this access benefits you. Your story matters. Abstract I build a dynamic capital structure model that demonstrates how business-cycle variations in expected growth rates, economic uncertainty, and risk premia influence firms' financing and default policies. Countercyclical fluctuations(More)
We use text-based analysis of 10-K product descriptions to examine whether firms exploit product market synergies through asset complementarities in mergers and acquisitions. Transactions are more likely between firms that use similar product market language. Transaction stock returns, ex post cash flows, and growth in product descriptions all increase for(More)
In the neoclassical theory of the firm, actions are taken to maximize the present value of the firm's cash flows-there is no role for managerial attitudes in forming corporate policies. In contrast, our paper provides striking evidence that links psychological traits such as managerial risk aversion, time preference, and optimism to corporate financial(More)
Explicit presence of a reorganization process in addition to liquidation can lead to conflicts of interest between borrowers and lenders. In the first-best outcome, the reorganization adds value to both parties via higher debt capacity, lower credit spreads, and improvement in the overall firm value. If control of the ex-ante timing of reorganization and(More)
and Gerzensee Summer Symposium for comments. We are especially grateful to the anonymous referee for constructive comments which has significantly improved the exposition of the paper. Jianjun Miao gratefully acknowledges financial support from Research Grants Council of Hong Kong under the project number 643507. Abstract Entrepreneurs face significant(More)
We study the interplay between corporate liquidity and asset reallocation. Our model shows that financially distressed firms are acquired by liquid firms in their industries even in the absence of operational synergies. We call these transactions ''liquidity mergers,'' since their purpose is to reallocate liquidity to firms that are otherwise inefficiently(More)
We study how interactions between financing and investment decisions can shape firm boundaries in dynamic product markets. In particular, we model a new product market opportunity as a growth option and ask whether it is best exploited by a large incumbent firm (Integration) or by a separate, specialized firm (Non-Integration). Starting from a standard(More)
We test whether top financial executives are miscalibrated using a unique 10-year panel that includes over 13,300 probability distributions of expected stock market returns. We find that executives are severely miscalibrated, producing distributions that are too narrow: realized market returns are within the executives' 80% confidence intervals only 36% of(More)
We develop a model of investment timing under uncertainty for a financially constrained firm. Facing external financing costs, the firm prefers to fund its investment through internal funds, so that the firm's optimal investment policy and value depend on both its earnings fundamentals and liquidity holdings. We show that financial constraints significantly(More)
This paper revisits the pecking-order theory of Myers and Majluf (1984) in a real options framework, where asymmetric information is the only friction. We show that when insiders are relatively better informed on the assets in place, rather than on new growth opportunities, equity can dominate debt, reversing the pecking order. Thus, our model can explain(More)
  • 1