We show theoretically that optimism can lead a risk-averse Chief Executive Officer (CEO) to choose the first-best investment level that maximizes shareholder value. Optimism below (above) the interior optimum leads the CEO to underinvest (overinvest). Hence, if boards of directors act in the...

Research suggests that boards of directors select CEOs using signals of ability. However, little is known about how boards determine the combination of attributes that constitute a ‘good’ CEO, especially attributes without an ex ante clear impact on managerial quality, such as CEO optimism....

The economic value of the Say-On-Pay (SOP) provision of the Dodd–Frank Act has been a subject of debate. Proponents of this provision suggest these votes benefit shareholders by increasing investor influence over managerial compensation. Opponents of the SOP provision believe compensation...

This paper solves the pricing problem of an merging market debt contract in which the borrower’s economy is subject to rare event risk. Our model combines elements of a reduced form and a structural model of debt pricing. Rare event risk is modeled as a sudden event in fundamentals, and...

We quantify the effect of financial leverage on stock return volatility in a dynamic general equilibrium economy with debt and equity claims. We study the effects of financial leverage on the market portfolio, and on a small firm with idiosyncratic and market risk. In an economy with both a...

We study the consumption-portfolio problem with realized capital gain taxation. The distinguishing feature of our analysis is that we impose on the model an important element of the tax code that has received little attention in the academic literature: the limited use of capital losses....

We use a calibrated dynamic general equilibrium economy with heterogeneous beliefs to study the effects of a short--selling constraint on stock prices, stock price volatility, and interest rates. We find large stock price and volatility effects from heterogeneous beliefs, without introducing...

Asset prices are risky, in part, because of uncertainty about the preferences of potential counterparties and the terms-of-trade at which they will be willing to provide liquidity in the future. We call such randomness liquidity risk. We argue that liquidity risk is an important source of...