We examine management's choice of several accounting accruals following an exogenous event that more closely aligned their fiduciary duty to both shareholders and creditors. We build on the work of Becker and Stromberg (2012) who study the change in investment behavior of Delaware incorporated firms following a 1991 legal ruling that set a precedent that firms nearing financial distress (but no...

Compensating a manager with their own firm’s equity induces effort but also exposes the manager to firm-specific risk. Consequently, the discount rate of the undiversified manager differs from that of a diversified shareholder, resulting in a distortion in the optimal investment and financing policies chosen by the manager. We embed an agency conflict in a neoclassical model of the firm to inve...

The dynamic transformation of the Polish economy from a centrally planned to market economy is by now well advanced. The transformation has also contributed to a rapid development of the capital market. However, the leveraged buyout market has hardly been developed yet. The leveraged buyout technique allows investors to take companies over with little of their own capital. Most of the total val...

This essay discusses the corporate governance of banks. Bank managers must balance competing demands from shareholders and regulators, which distinguishes banks from most other firms. The essay is structured into three parts. The theoretical section first broadly defines management and its governance as a process with certain built-in ambiguities that defy a strict notion of accountability. The...

We consider a model in which banks face two moral hazard problems: 1) asset substitution by shareholders, which can occur when banks make socially-inefficient, risky loans; and 2) managerial under-provision of effort in loan monitoring. The privately-optimal level of bank leverage is neither too low nor too high: It efficiently balances the market discipline that owners of risky debt impose on ...

We examine the interaction between capital structure and dividend initiation. Reasons often given for the positive abnormal return when firms initiate dividends are the signaling of asymmetric information and the reductions of agency costs. Theory also suggests that these are reasons for choosing debt in the capital structure. This study finds that the effect of initiating dividends is dampened...

Equity home bias is one of the most enduring puzzles in international finance. In this paper, I start out by documenting a novel stylized fact about home bias: countries with weaker domestic institutions hold fewer foreign assets. I then explore a macroeconomic mechanism by which the presence of agency problems in firms may explain this pattern. To do so, I develop a two-country dynamic stochas...

Agency theories predict that firms acquire and diversify through acquisitions as they grow older and exhaust their internal growth opportunities, and that they do so for the benefit of managers rather than shareholders. In contrast, we find that acquiring firms are firms with better growth opportunities and performance irrespective of their lifecycle stage. While younger firms acquire more than...

We theoretically and empirically investigate the effects of manager-specific characteristics on capital structure. We develop a dynamic structural model in which a manager affects a firm’s earnings through her ability and effort. The manager receives dynamic incentives through explicit contracts with shareholders. We derive the manager’s contracts and implement them through financial securities...

This study examines the contracting benefits of accounting conservatism on international debt and equity markets. Results show that firms domiciled in countries with more conservative financial reporting systems have significantly lower cost of debt and equity capital, after controlling for differences in legal institutions and securities regulations. I use one-year-ahead interest rate to measu...