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We derive the optimal dynamic contract in a continuous-time principal-agent setting, and implement it with a capital structure (credit line, long-term debt, and equity) over which the agent controls the payout policy. While the project's volatility and liquidation cost have little impact on the firm's total debt capacity, they increase the use of credit(More)
We propose a boundedly-rational model of opinion formation in which individuals are subject to persuasion bias; that is, they fail to account for possible repetition in the information they receive. We show that persuasion bias implies the phenomenon of social influence, whereby one's influence on group opinions depends not only on accuracy, but also on how(More)
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We model the term structure of interest rates as resulting from the interaction between investor clienteles with preferences for specific maturities and risk-averse arbitrageurs. Because arbitrageurs are risk averse, shocks to clienteles' demand for bonds affect the term structure— and constitute an additional determinant of bond prices to current and(More)
We identify and analyze a class of economies with asymmetric information that we call quasi-complete. For quasi-complete economies we determine equilibrium trades, show that the set of fully informative equilibria is a singleton, and give necessary and sufficient conditions for the existence of partially informative equi-libria. Besides unifying some(More)
We analyze the design and renegotiation of covenants in debt contracts as a specific example of the contractual assignment of property rights under asymmetric information. In particular, we consider a setting where managers are better informed than the lenders regarding potential transfers from debt to equity that are associated with future investments. We(More)
We use credit default swaps (CDS) trading data to demonstrate that the credit risk of reference firms, reflected in rating downgrades and bankruptcies, increases significantly upon the inception of CDS trading, a finding that is robust after controlling for the endogeneity of CDS trading. Additionally, distressed firms are more likely to file for bankruptcy(More)
This paper studies performance-sensitive debt (PSD), the class of debt obligations whose interest payments depend on some measure of the borrowers performance. We demonstrate that the existence of PSD obligations cannot be explained by the trade-off theory of capital structure, as PSD leads to earlier default and lower equity value compared to fixed-rate(More)