We study empirically the effect of focus (specialization) versus diversification on the return and the risk of banks using data from 105 Italian banks over the period 1993–99. Specifically, we analyse the trade-offs between (loan portfolio) focus and diversification using a unique data set...

We model corporate liquidity policy and show that aggregate risk exposure is a key determinant of how firms choose between cash and bank credit lines. Banks create liquidity for firms by pooling their idiosyncratic risks. As a result, firms with high aggregate risk find it costly to get credit...

This paper analyzes financial institutions' capital allocation decisions when their required equity capital depends on the risk of their projects chosen. We discuss the relevance of strict position limits against discretionary trading through the use of an optimal compensation function. We show...

For many private firms, relationship lending is the only viable form of outside financing. Relationship lending typically relies on intertemporal loan pricing: losses from early years are recovered by information rents in later years, which stem from the lender's private information regarding...

We examine the role of security design when lenders make inefficient accept-or-reject decisions after screening projects. Lenders may be either 'too conservative', in which case they reject positive-NPV projects. Or they may be 'too aggressive', in which case they accept negative-NPV projects....

Legislation affects corporate governance and the return to human and financial capital. We allow the preference of a political majority to determine both the governance structure and the extent of labour rents. In a society where median voters have relatively more at stake in the form of human...

We propose that stronger creditor rights in bankruptcy reduce corporate risk-taking. Employing country-level data, we find that strong creditor rights are associated with a greater propensity of firms to engage in diversifying mergers, and this propensity changes in response to changes in the...

We examine whether stock market-listed firms in the U.S. invest suboptimally due to agency costs resulting from separation of ownership and control. We derive testable predictions to distinguish between underinvestment due to rational “short-termism” and overinvestment due to “empire...

We examine deal-level data on private equity transactions in the UK initiated during the period 1996 to 2004 by mature private equity houses. We un-lever the deal-level equity return and adjust for (un-levered) return to quoted peers to extract a measure of "alpha" or abnormal performance of the...

We develop a model of internal governance where the self-serving actions of top management are limited by the potential reaction of subordinates. We find that internal governance can mitigate agency problems and ensure firms have substantial value, even without any external governance. Internal...