We study a model of a decentralized firm with moral hazard and intrafirm trade. Relationship-specific investments, by making internal trade more profitable at the margin, result in greater expected trade volume and thereby greater compensation risk borne by division managers. Formally accounting for this investment/risk link overturns some key findings in prior incomplete contracting studies. F...

Using a novel and flexible regression approach that avoids imposing restrictive modeling assumptions, we find evidence of a nonmonotonic relation between conditional volatility and expected stock market returns. At low and medium levels of conditional volatility there is a positive risk-return trade-off, but this relation is inverted at high levels of volatility. This finding helps explain the ...

Both financing and risk management involve promises to pay that need to be collateralized, resulting in a financing versus risk management trade-off. We study this trade-off in a dynamic model of commodity price risk management and show that risk management is limited and that more financially constrained firms hedge less or not at all. We show that these predictions are consistent with the evi...