We develop a theory of how agency conflicts between the shareholders and debt holders of a financial institution, accounting measurement rules, and prudential capital regulation interact to affect the institution's capital structure and project choices. We show that, relative to a benchmark...

In this paper, I provide two general insights that are useful in evaluating the economic trade-offs of alternative accounting measurement rules. First, when there are multiple imperfections in the world, restricting a strict subset of it need not always improve welfare. Second, a firm is not a...