A rate-of-return regime characterized by "fairness" satisfies two criteria: the total allowed return on the rate base is equal to the cost of capital, and the regulated firm should be able to raise capital without either gain or loss to existing equity holders. Assuming a monopoly firm with a...

Hub-and-spoke regulation, where a central regulator with legal power over firms delegates monitoring to local supervisors, can improve information collection, but can also lead to agency problems and capture. We document that following the closure of a US bank regulator's field offices, the...

This article studies how the managers of a regulated firm can use debt and equity contracts to constrain the regulator's policy through the contingent transfer of control to external investors with high relative liquidation value. External finance increases regulated income and facilitates...

This paper provides an explanation for the observation that banks hold on average a capital ratio in excess of regulatory requirements. We use a functional approach to banking based on Diamond and Rajan (2001) to demonstrate that banks can use capital ratios as a strategic tool for renegotiating...

We propose a theory of optimal firm financing given nested information problems of adverse selection and agency cost. We prove that there exists a unique perfect Bayesian equilibrium with novel features: First, three types of optimal contracts arise endogenously, i.e., equity, transparent debt...

A theory of capital structure in which costs associated with asymmetric information are the sole friction is used to present a new perspective on the standard pecking order theory. In the model, both the amount of debt and the restrictiveness of the associated debt covenants are considered to be...

We present a tradeoff theory of capital structure in which costs associated with asymmetric information are the sole friction. By considering both the amount of debt as well as the restrictiveness of the associated debt covenants a more complete characterization of debt structure is examined...

This paper is the first attempt to reconcile the prospect theory and the contract theory in explaining the observed financing decisions. In a world of ambitious and aggressive economic agents, even the original equilibria under the presence of asymmetric information break down. When the...

In this article we argue that asymmetric information can explain why seignorage is an inferior choice to debt for governments. We also argue that the Ricardian equivalence for governments is very similar to what the Modigliani-Miller proposition is for corporations. Our model is based on Bolton...