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 extend the continuous Cumulative Prospect Theory (CPT) by considering piecewise con-tinuous distributions with a finite number of jump discontinuities. Such distributions are rele-vant in practice, for example, within the framework of financial engineering since cash flow distributions of...

We analyze how the introduction of repurchases in 1998, and a major tax reform in 2001, affected the payout policy of German firms. To this end, we estimate Lintner (1956) partial adjustment models for both dividends and total payouts. We also analyze the implications for payout of changes in...

We model the joint effects of debt maturity and cash holdings on default risk. When firms have short-term debt outstanding, negative cash flow shocks lead to a drop in liquid reserves and may cause firms to suffer losses when rolling over their debt, due to weaker fundamentals. This mechanism...

We model the financing, cash holdings, and hedging policies of a firm facing financing frictions and subject to permanent and transitory cash flow shocks. We show that permanent and transitory shocks generate distinct, sometimes opposite, effects on corporate policies and use the model to...

In response to technological change, U.S. corporations have been investing more in intangible capital. This transformation is empirically associated with lower leverage and greater cash holdings, and commonly explained as a precautionary response to reduced debt capacity. We model how firms'...

Classical corporation tax entails double taxation of corporate income. The alternative practice to impute corporation tax to the domestic recipients of dividends is shown, in the case of a company with international owners, effectively to convert the imputation system back to a classical...

Much of financial theory and practice is built on the presumption that markets are liquid. In a liquid market, you should be able to buy or sell any asset, in any quantity, at the prevailing market price and with no transactions costs. Using that definition, no asset is completely liquid and...

The dual model with diffusion is appropriate for companies with continuous expenses that are offset by stochastic and irregular gains. Examples include research-based or commission-based companies. In this context, Avanzi and Gerber (2008) showed how to determine the expected present value of...

We show that while firms that typically pay dividends already have high ratios of retained-earnings-to-total-equity (RE/TE) and high propensities to pay (PTP) early on, firms that typically do not pay dividends have persistently low RE/TE and low PTP even after 20 years of growth. This...