We present a general equilibrium-mechanism design model with two-sided limited commitment that accounts for the observed heterogeneity in firms' investment, payout and CEO-compensation policies. In the model, shareholders cannot commit to holding negative net present value projects, and managers...

We develop a firm-dynamics model with moral hazard, which arises because some productivity shocks are privately observed by firm managers only. We characterize the optimal contract and its implications for firm size, growth, and managerial pay-performance sensitivity, which allow us toquantify...

We propose to measure growth opportunities by firms' exposure to idiosyncratic volatility news. Theoretically, we show that the value of a growth option increases in idiosyncratic volatility but its response to volatility of aggregate shocks can be either positive or negative depending on option...