A number of authors have noted that when a firm issues risky debt in the absence of binding state-contingent contracts, the maximize-present-value rule becomes ambiguous. This paper shows that incomplete (asymmetric) information can explain why the firm will make value-maximizing decisions when...

The standard theory of capital structure argues that firms trade off the tax advantage of debt against ba nkruptcy costs. R. A. Haugen and L. W. Senbet (1978) pointed out that there is a problem with this theory: if bankruptcy involves deadweig ht costs, shareholders and bondholders have an...

This paper examines banks' provision of liquidity to depositors and provision of loans. The problem identified is that banks may not be able to provide new funds for borrowers who are short of cash, because either the return on investments is poor, or because depositors withdraw more funds than...

This article reverses the standard conclusion that asymmetric information plus competition results in insufficient insurance provision. Risk-tolerant individuals take few precautions and are disinclined to insure, but they are drawn into a pooling equilibrium by the low premiums created by the...

This article presents a model of the interaction of a company's financial and real investment decisions with the financing of its defined benefit pension plan. The pension plan deficit is a debt of the company, with explicit funding requirements and priority in the event of company insolvency....

The creditors' bargain view of insolvency law argues that solvency stats rights should be preserved in insolvency states. It argues that insolvency law should be an extension of commercial law. This paper examines the Insolvency Act (1986) in the United Kingdom from the perspective of the...

This paper shows that long-term contracts can be used in competitive financial markets to separate entrepreneurs of different abilities. In equilibrium, poor entrepreneurs are financed with a sequence of standard-debt contracts. Good entrepreneurs are financed with a modified contract in which...