We show theoretically and empirically that in the presence of time-varying cost of capital (COC), firms have a hedging motive to reduce the overall COC by saving cash when COC is relatively low. The sensitivity of cash savings to COC is especially pronounced with respect to the cost of equity...

We use portfolio theory to quantify the efficiency of state-level sectoral patterns of production in the United States. On the basis of observed growth in sectoral value-added output, we calculate for each state the efficient frontier for investments in the real economy. We study how rapidly...

We study two-period pure-exchange Capital Asset Pricing Model (CAPM) economies with incomplete financial markets and restricted participation. We characterize the optimal financial-market structure and the efficient innovations consisting of both the introduction of new assets and the...

We document that the deregulation of bank branching restrictions in the United States triggered a reallocation across sectors, with end effects on state-level volatility. This change in state-level volatility cannot be explained simply by shifts in sector-level returns and volatility. A...

We document that the deregulation of bank branching restrictions in the United States triggered a reallocation across sectors, with end effects on state-level volatility. The change cannot be explained simply by shifts in sector-level returns and volatility. A reallocation effect is at play,...

We use portfolio theory to quantify the efficiency of state-level sectoral patterns of production in the United States. On the basis of observed growth in sectoral value added output, we calculate for each state the efficient frontier for investments in the real economy, the efficient Sharpe...

Banks face two different kinds of moral hazard problems: asset substitution by shareholders (e.g., making risky, negative net present value loans) and managerial rent seeking (e.g., investing in inefficient 'pet' projects and consuming perquisites that yield private benefits). The privately...

Banks face two different kinds of moral hazard problems: asset substitution by shareholders (e.g., making risky, negative net present value loans) and managerial rent seeking (e.g., investing in inefficient “pet” projects and consuming perquisites that yield private benefits). The privately...

We study the exposure of the U.S. corporate bond returns to liquidity shocks of stocks and treasury bonds over the period 1973-2007 in a regime switching model. In one regime, liquidity shocks have mostly insignificant effect on bond prices, whereas in another regime, a rise in illiquidity...

We model corporate liquidity policy and show that aggregate risk exposure is a key determinant of how firms choose between cash and bank credit lines. Banks create liquidity for firms by pooling their idiosyncratic risks. As a result, firms with high aggregate risk find it costly to get credit...