This paper provides an explanation for the urge of banks to merge and expand scope. We build a model where bank activities evolve over time. Due to deregulation and technological advances, new opportunities become available, but the skill needed to exploit them effectively may be unknown. Early...

We analyze a publicly-traded firm’s decision to stay public or go private when managerial autonomy from shareholder intervention affects the supply of productive inputs by management. We show that both the advantage and the disadvantage of public ownership relative to private ownership lie in...

In this Paper we analyse an entrepreneur/manager’s choice between private and public ownership in a setting in which management needs some ‘elbow room’ or autonomy to manage the firm optimally. In public capital markets, the corporate governance regime in place exposes the firm to...

In this Paper, we provide a novel rationale for credit ratings. The rationale that we propose is that credit ratings can serve as a coordinating mechanism in situations where multiple equilibria can obtain. We show that credit ratings provide a ‘focal point’ for firms and their investors. We...

We develop an economic theory of ‘flexibility’, which we interpret as the discretion or ability to make a decision that others disagree with. We show that flexibility is essentially an option for the decision-maker, and can be valued as such. The value of the flexibility option is decreasing...

We study the effects of a bank’s engagement in trading. Traditional banking is relationship-based: not scalable, long-term oriented, with high implicit capital, and low risk (thanks to the law of large numbers). Trading is transactions-based: scalable, short-term, capital constrained, and with...

In this Paper we introduce flexibility as an economic concept and apply it to the firm’s security-issuance decisions and capital structure choice. Flexibility is the ability to make decisions that one thinks are best even when others disagree. Firms value flexibility because it allows...

Economic theory points to five parties active in disciplining management of poorly performing firms: holders of large share blocks, acquirers of new blocks, bidders in take-overs, non-executive directors, and investors during periods of financial distress. This Paper reports the first...

Countries appear to differ considerably in the basic orientations of their corporate governance structures. We postulate the trade-off between objectivity and proximity as fundamental to the corporate governance debate. We stress the value of objectivity that comes with distance (e.g. the market...