We analyze shareholders' incentives to change the leverage of a firm that has already borrowed substantially. As a result of debt overhang, shareholders have incentives to resist reductions in leverage that make the remaining debt safer. This resistance is present even without any government...

Supplementing the discussion in our book The Bankers' New Clothes: What's Wrong with Banking and What to Do about It, this paper examines the plausibility and relevance of claims in banking theory that fragility in bank funding is useful because it imposes discipline on bank managers. The...

The debate on banking regulation has been dominated by flawed and misleading claims. The title of our book The Bankers New Clothes: What's Wrong with Banking and What to Do about It (Princeton University Press, 2013, see bankersnewclothes.com) refers to flawed claims about banking and banking...

Firms' inability to commit to future funding choices has profound consequences for capital structure dynamics. With debt in place, shareholders pervasively resist leverage reductions no matter how much such reductions may enhance firm value. Shareholders would instead choose to increase leverage...

We examine the pervasive view that "equity is expensive," which leads to claims that high capital requirements are costly for society and would affect credit markets adversely. We find that arguments made to support this view are fallacious, irrelevant to the policy debate by confusing private...