We examine the relation between CEOs' equity incentives and their use of performance-sensitive debt contracts. These contracts require higher or lower interest payments when the borrower's performance deteriorates or improves, thereby increasing expected costs of financial distress while also...

We examine the relation between CEOs equity incentives and their use of performance-sensitive debt contracts. These contracts require higher or lower interest payments when the borrower's performance deteriorates or improves, thereby increasing expected costs of financial distresswhile also...

This paper studies optimal security design in a dynamic setting with an agency problem that arises when an agent in charge of a project can divert cash flows for his own consumption at the expense of an outside investor. Cash flows are unobservable and unverifiable by the outside investor, who...

This paper studies performance-sensitive debt (PSD), the class of debt obligations whose interest payments depend on some measure of the borrowers performance. We demonstrate that the existence of PSD obligations cannot be explained by the trade-off theory of capital structure, as PSD leads to...

This paper provides a theoretical analysis of the efficiency of prepayment penalties in a dynamic competitive lending model with risky borrowers and costly default. When considering improvements in the borrower's creditworthiness as one of the reasons for refinancing mortgages, we show that...

This paper considers the optimal design of mortgage backed securities (MBS) in a dynamic setting with moral hazard. A mortgage underwriter with limited liability can engage in costly effort to screen for low risk borrowers and can sell loans to a secondary market. Secondary market investors...

We characterize the optimal mortgage contract in a continuous time setting with stochastic growth in house price and income, costly foreclosure, and a risky borrower who requires incentives to repay his debt. We show that many features of subprime loans can be consistent with properties of the...

This paper studies optimal mortgage design in a continuous time setting with volatile and privately observable income, costly foreclosure, and a stochastic market interest rate. We show that the features of the optimal mortgage are consistent with an option adjustable-rate mortgage (option ARM)....

This paper studies optimal mortgage design in a continuous time setting with volatile and privately observable income, costly foreclosure, and a stochastic market interest rate. We show that the features of the optimal mortgage are consistent with an option adjustable-rate mortgage (option ARM)....

This paper explores the practice of mortgage refinancing in a dynamic competitive lending model with risky borrowers and costly default. We show that the prepayment penalties are welfare improving, and that they are more beneficial to borrowers with higher risk of default. The empirical evidence...