Innovation is a contract intensive economic activity in a world of incomplete contracts. We show that trust mitigates incomplete contracting and enhances innovation by acting as an informal contracting mechanism. Trust plays an especially important role when formal laws and regulations are...

We examine whether executive stock options can induce excessive risk taking by managers in firms' security issue decisions. We find that CEOs whose wealth is more sensitive to stock return volatility due to their option holdings are more likely to choose debt over equity as a capital-raising...