If a bank is facing insolvency, it will be tempted to reject good loans and accept bad loans so as to shift risk onto its creditors. We analyze the effectiveness of buying up toxic mortgages in troubled banks, buying preferred stock, and buying common stock. If bailing out banks deemed “too...

This paper develops an agency model to analyze the optimality of executive stock option compensation in the presence of information manipulation. The analyses show that although information manipulation is positively related to the size of option compensation, the relative size of...