Learn More
We document the di erential pricing of individual equity options versus the market index, and relate it to variations in return skewness. The impact of risk aversion induced by marginalutility tilting of the physical density can introduce skewness in the risk-neutral density. We derive laws that decompose individual return skewness into a systematic(More)
This paper examines the secondary market for loan sales, focusing on whether loan contract design can reduce agency problems in loan sales and the benefits and costs to corporate borrowers. We argue that covenants aid loan sales by protecting the loan buyer from potential losses caused by informationallyadvantaged borrowers and loan sellers. Using(More)
We develop a profit-maximizing neoclassical model of optimal firm size and growth across different industries based on differences in industry fundamentals and firm productivity. In the model, a conglomerate discount is consistent with profit maximization. The model predicts how conglomerate firms will allocate resources across divisions over the business(More)
We provide an explanation for hedging as a means of allocating rather than reducing risk. We argue that firms facing a total risk constraint optimally allocate risk by reducing (increasing) exposure to risks providing zero (positive) economic rents. Our evidence suggests that mutual thrifts which convert to stock institutions reduce interestrate risk(More)
This paper studies the connection between risk taking and executive compensation in financial institutions. A theoretical model of shareholders, debtholders, depositors, and an executive suggests that 1) in principle, excessive risk taking (in the form of risk shifting) may be addressed by basing compensation on both stock price and the price of debt(More)
We examine how managerial incentives a¤ect acquisition decisions in the banking industry. We …nd that higher pay-for-performance sensitivity (PPS) leads to value-enhancing acquisitions. Banks whose CEOs have higher PPS have signi…cantly better abnormal stock returns around the acquisition announcements. On average, acquirers in the High-PPS group outperform(More)
We examine whether mandating banks to issue subordinated debt would enhance market monitoring and control risk taking. To evaluate whether subordinated debt enhances risk monitoring, we extract the credit-spread curve for each banking firm in our sample and examine whether changes in credit spreads reflect changes in bank risk variables, after controlling(More)
We develop a pro ̄t-maximizing neoclassical model of optimal ̄rm size and growth across di®erent industries based on di®erences in industry fundamentals and ̄rm productivity. The model predicts how conglomerate ̄rms will allocate resources across divisions over the business cycle and how their responses to industry shocks will di®er from those of(More)