We show that banks significantly under-report the risk in their trading book when they have lower equity capital. Specifically, a decrease in a bank's equity capital results in substantially more violations of its self-reported risk levels in the following quarter. The under-reporting is...

We consider the effect of hedging with foreign currency derivatives on Brazilian firms in the period 1997 through 2004, a period that includes the Brazilian currency crisis of 1999. We find that, derivative users have valuations that are higher than non-user firms. Hedging with currency...

We document that firms decrease their leverage when they convert growth options into tangible assets. We argue that the act of growth option exercise decreases information asymmetry about the firm, which in turn reduces the relative cost of issuing information-sensitive securities such as...

We provide causal evidence that adverse capital shocks to banks affect their borrowers' performance negatively. We use an exogenous shock to the U.S. banking system during the Russian crisis of Fall 1998 to separate the effect of borrowers' demand of credit from the supply of credit by the...

An originate-to-distribute (OTD) model of lending, where the originator of a loan sells it to various third parties, was a popular method of mortgage lending before the onset of the subprime mortgage crisis. We show that banks with high involvement in the OTD market during the pre-crisis period...

We study the key drivers of security design in the residential mortgage-backed security (RMBS) market during the run-up to the subprime mortgage crisis. We show that deals with a higher level of equity tranche have a significantly lower delinquency rate conditional on observable loan...

Despite plenty of anecdotal evidence of hidden losses in banks, there is no systematic study analyzing the economic drivers of this behavior: we simply do not get to observe what banks are hiding unless they are caught. Using a regulatory change in India that forced all commercial banks to...

In competitive capital markets, portfolios of risky debt claims have high systematic risk exposure in bad times if they offer a high "yield" in good times. We apply this idea to measurement of bank risk. Rather than trying to directly measure asset risks on the balance sheet — the typical...