We analyze exchange-rate management by the central bank when it makes the FX market for the sake of social-welfare objectives. It is assumed that markets are incomplete, so that agents are exposed to exchange-rate volatility against which they cannot fully hedge. It follows that the central bank...

This paper explores the business cycle implications of financial distress and bankruptcy law. We find that due to the presence of financial imperfections the effect of liquidations on the price of capital goods can generate endogenous fluctuations. We show that a law reform that...

This paper reports a new test of capital structure theories. It uses a filtering technique to identify large investment spikes. We find that the spikes are predominantly financed with debt by large firms and with new equity by small firms. In the process of financing large projects, firms move...

The basic question regarding sovereign debt is why sovereign borrowers ever repay, provided that creditors have no power to foreclose on any of their assets. In this paper we suggest an answer: sovereign debt will be served as long as the median voter is a net loser from default. Default...

How do firms finance large cash flow requirements? We examine this in the context of firms that are subject to substantial cash flow requirements. We find that trade credit, inventory and cash stock reductions are all important in the short term for mild requirements. Larger and longer cash flow...

We argue that ceteris paribus, introducing a habit that resolves the equity premium puzzle is equivalent to increasing the coefficient of relative risk aversion. Thus, if habit is modeled subject to the constraint that the Arrow-Pratt coefficient of relative risk aversion is held at a constant...

In 2002, a new legislation that harmonises insolvency laws within the EU came into effect. I find reasons – both theoretical and empirical – to doubt whether the new law has achieved the goal of decreasing the cost of cross-border insolvency and borrowing. I thus suggest an...