Financing terms and investment decisions are jointly determined. This interdependence links firms' asset and liability sides and can lead to short-termism in investment. In our model, financing frictions increase with the investment horizon, such that financing for long-term projects is...

We argue that the empirical evidence against the Capital Asset Pricing Model (CAPM) based on stock returns does not invalidate its use for estimating the cost of capital for projects in making capital budgeting decisions. Since stocks are backed not only by projects in place, but also the...

Entrepreneurs face significant non-diversifiable business risks. We build a dynamic incomplete markets model of entrepreneurial finance to demonstrate the important implications of nondiversifiable risks for entrepreneurs' interdependent consumption, portfolio allocation, financing, investment,...

Building on neoclassical reasoning, we propose a new multi-factor model that consists of the market factor and factor mimicking portfolios based on investment and productivity. The neo- classical three-factor model outperforms traditional factor models in explaining the average returns across...

Entrepreneurs often face undiversifiable idiosyncratic risks from their business investments. We extend the standard real options approach to an incomplete markets environment and analyze the joint decisions of business investments, consumption/savings, and portfolio selection. For a lump-sum...

The real options framework has been used extensively to analyze the timing of investment under uncertainty. While standard real options models assume that agents possess a constant rate of time preference, there is substantial evidence that agents are very impatient about choices in the...

Previous research on the United States and Japan finds economically large impacts of changing real estate collateral value on firm investment. Working with unique data on land values in 35 major Chinese markets and a panel of firms outside the real estate industry, we estimate investment...

An entrepreneur faces substantial non-diversifiable business risk and liquidity constraints, both of which we refer to as frictions. We show that these frictions have significant economic effects on business start-up, capital accumulation/asset sales, portfolio allocation, consumption/saving,...

We show that supply-side financial shocks have a large impact on firms' investment. We do this by developing a new methodology to separate firm-borrowing shocks from bank supply shocks using a vast sample of matched bank-firm lending data. We decompose loan movements in Japan for the period 1990...

We propose and test a theory of corporate liquidity management in which credit lines provided by banks to firms are a form of monitored liquidity insurance. Bank monitoring and resulting credit line revocations help control illiquidity-seeking behavior by firms. Firms with high liquidity risk...