A popular interpretation of the Rational Expectations/Efficient Markets hypothesis states that, if the hypothesis holds, then market valuations must follow a random walk. This postulate has frequently been criticized on the basis of empirical evidence. Yet the assertion itself incurs what we...

The paper develops a model of firmś investment under uncertainty with financial market imperfections and analyzes the effects of financial constraints on firmś investment. Firmś investment is an increasing function of the firmś marginal q, however the investment function is characterized by...

This paper studies the question of the economic scale of financial institutions. We show that banks actively smooth book equity by adjusting payouts to achieve a desired trajectory of book equity. The countercyclical nature of net payouts of financial institutions leads to procyclical book...