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We provide results for the valuation of European style contingent claims for a large class of speci…cations of the underlying asset returns. Our valuation results obtain in a discrete time, in…nite state-space setup using the no-arbitrage principle and an equivalent martin-gale measure. Our approach allows for general forms of heteroskedasticity in returns,(More)
Recent evidence shows that corporate policies change significantly following financial covenant violations. These changes are attributed to increased creditor influence over borrowing firms in ways that benefit both shareholders and debtholders. In this paper, I investigate whether shareholders engage in activities counter to creditors' interests following(More)
Assessments of the trade-off theory have typically compared the present value of tax benefits to the present value of bankruptcy costs. We show that this comparison overwhelmingly favors tax benefits, suggesting that firms are under-leveraged. However, when we allow firms to experience even modest financial distress costs prior to bankruptcy (e.g.,(More)
We thank the anonymous referee for excellent comments and suggestions that have significantly improved the paper. We would also like to thank the Editor (Abstract In a model of dual agency problems where borrower-lender and bank-nonbank incentives may conflict, we predict a hockey stick relation between bank skin in the game and covenant tightness. As bank(More)
We explore how asymmetric information in financial markets affects outcomes in product markets. Difference-indifference tests around brokerage house merger/closure events (which increase asymmetric information through reductions in analyst coverage) indicate worse industry-adjusted sales growth for shocked firms than for their peers. Our results are(More)
T his paper proposes a new methodology to infer investors' expectations about the speed of leverage adjustment implicit in the prices of credit instruments. On average, the credit markets imply a fairly rapid annual speed of adjustment of 26% toward a firm's predicted leverage. The speed varies considerably across partitions formed by the differential(More)
In this paper we solve for the optimal portfolio allocation in a dynamic setting, where both conditional correlation and dependence between extremes are considered. We demonstrate that there are substantial economic costs for investors in disregarding either the dynamics of conditional correlation or the clustering of extreme events. The welfare loss(More)
We show that political uncertainty surrounding elections can affect how corporate investment responds to stock prices. In a large panel of elections around the world, investment is 40% less sensitive to stock prices during election years compared to non-election years. The decrease in investment-to-price sensitivity appears to be due to stock prices(More)