We provide an approach to the market valuation of deposit insurance that is based on reduced-form methods for the pricing of fixed-income securities under default risk. By reference to bank debt prices as well as qualitative-response models of the probability of bank failure, we suggest how a...

This paper examines whether the market underreacts to the negative information implicit in the SEO (seasoned equity offerings) announcements. While rational and mispricing theories both predict SEO's, in the aggregate, should earn low returns in the long run, they offer sharply different...

This paper extends the current theoretical models of corporate risk-management in the presence of financial distress costs and tests the model's predictions using a comprehensive dataset. I show that the shareholders optimally engage in ex-post (i.e., after the debt issuance) risk-management...

I analyze the effects of bank characteristics and macroeconomic shocks on interest rate risk-management behavior of commercial banks. My findings are consistent with hedging theories based on cost of financial distress and costly external financing. Banks with higher probability of financial...

We find a positive cross-sectional relationship between expected stock returns and default risk, contrary to the negative relationship estimated by prior studies. Whereas prior studies use noisy ex post realized returns to estimate expected returns, we use ex ante estimates based on the implied...

We undertake a broad-based study of the effect of managerial risk-taking incentives on corporate financial policies and show that CEOs' and CFOs' risk-taking incentives significantly influence their firms' financial policies. In particular, we find that CEOs' risk-decreasing (-increasing)...

We provide causal evidence that adverse capital shocks to banks affect their borrowers' performance negatively. We use an exogenous shock to the U.S. banking system during the Russian crisis of Fall 1998 to separate the effect of borrowers' demand of credit from the supply of credit by the...