We examine how insiders and firms trade when arbitrage is limited. When arbitrage is costly (proxied by high idiosyncratic risk), insiders and firms earn higher absolute returns on their trades (insider trading, share repurchases, and seasoned equity offerings) in the following year. Furthermore, they initiate their trades following greater past price movements in the preceding year. These resu...

Some studies have provided evidence that dual class shares reduce firm market value. Other studies have shown that dual class shares are more common in countries where the proxies for private benefits of control are low. In this paper we explore whether the negative relation between firm market value and dual class shares can be explained by lower takeover probability. For family controlled fir...

To ascertain whether the form of managerial compensation affects a firm’s long-term operating performance, we track IPOs for five years after the expiration of the stabilization period. New public companies perform better when managers receive a balanced combination of stock option grants and equity ownership. Firms with unbalanced compensation arrangements, large option grants and little equit...

I evaluate a bank’s incentives to implement a risk sensitive regulatory capital rule. The decision making is analyzed within a real options framework where optimal policies are derived in terms of threshold levels of risk. The bank’s customers, lenders, and other outsiders may influence the optimal decision. Outsiders may make it optimal for the bank to implement the risk sensitive rule earlier...

This study investigates the predictability of firm values for venture capital-backed firms. Having insights into the internal documents of more than 300 venture capitalists, we derive three common categories of firm value drivers: team characteristics, firm and market characteristics, and accounting information. Based on these value drivers, we provide a regression based valuation approach, whi...

We consider a setting in which two potential buyers, one with a prior toehold and one without, compete in a takeover modelled as an ascending auction with participating costs. The toeholder is more aggressive during the takeover process because she is also a seller of her own shares. The non-toeholder anticipates this extra-aggressiveness of the toeholder. Thus, the non-toeholder is deterred fr...

A standard assumption of structural models of default is that firms assets evolve exogenously. In this paper, we document the importance of accounting for investment options in models of credit risk. In the presence of financing and investment frictions, firm-level variables which proxy for asset composition carry explanatory power for credit spreads beyond leverage. As a result, cross-sectiona...

Using staggered changes to debt contract enforcement costs in India, we estimate it’s causal effect on financing and asset maturity. A reduction in enforcement costs is associated with an increase in long-term debt and a decrease in short-term debt and trade-credit. The increase in debt maturity is confined to firms that borrow from multiple and diverse set of lenders and to smaller firms. Firm...

I study managers' risk-taking behavior and how it is affected by equity-based compensation. I find that in response to an exogenous increase in takeover protection in Delaware during the mid-1990s, managers lower firm risk by 5%. I also find that the decrease in firm risk is concentrated among firms with low managerial equity-based incentives. In particular, firms with low CEO portfolio sensiti...

How do firms finance large cash flow requirements? We examine this in the context of firms that are subject to substantial cash flow requirements. We find that trade credit, inventory and cash stock reductions are all important in the short term for mild requirements. Larger and longer cash flow shortages give rise to more equity than debt finance. After the shocks, firms gradually adjust their...