Company financial reports are likely to be systematically biased. In this paper, we extend the Duffie and Lando (2001) model with a skewness correction which can account for both random and directional components of reporting noise.

Currency carry trades–buying high-deposit-rate currencies and selling low-deposit-rate currencies–earn positive excess returns over time. The literature has heretofore explained this phenomenon based on currency differences. We examine the possibility that the bank default risk of...

This paper finds that a newly created equity-for-guarantee swap can significantly increase a firm’s value. If the firm earns more/less in a recession/boom market, the guarantee cost will decrease. The greater the business risk is, the more the guarantee cost will decrease and the higher the...

A bank that needs a public bail-out to avoid liquidation can use financial contracts to provide contingent liquidation rights to investors and force the government to increase public support. Limiting the size of the bail-out before knowing the bank’s financial condition decreases welfare if...

We use a simple model to show that the importance of retained earnings and ownership concentration as bankruptcy determinants is inversely related to institutional quality. A test employing firm-level data for Korea and the US is consistent with this prediction.

Credit default swaps (CDSs) are thought to ease borrowing by protecting lenders against default. This paper develops a model of the demand for CDS when borrowers choose the riskiness of investment and verification is imperfect. The model shows that CDSs may lead to risk-shifting, increasing the...

We use business register data for the United Kingdom to document the importance of the different channels that firms use to adjust their size. We show how the choice of adjustment channel impacts upon firm-level variables such as wages or productivity.

Can higher technological capacity help firms to recover quicker from recessions? Analyzing the effects of the COVID-19 pandemic on firm revenues in several countries, we find that firms headquartered in jurisdictions with better digital infrastructure generated relatively higher revenue during...

Consistent with recent theoretical models, this paper finds that financial openness has a positive effect on private credit in economies characterized by a competitive banking sector, but that this effect vanishes and even becomes negative in economies with imperfect banking competition.