Existing capital accumulation models that show that goal congruence is achievable for sequential investment decisions rely on the assumption that the firm is operating in an ever-expanding product market. The good news is that this result can be extended to a setting with possible bad news about...

This paper extends the Q-theory of investment to capital goods with arbitrary efficiency profiles. Under the assumption of geometric economic depreciation employed by the traditional Q-theory, a firm's replacement cost of assets-in-place is independent of their vintage composition and can be...

More financially constrained firms are riskier and earn higher expected returns than less financially constrained firms, although this effect can be subsumed by size and book-to-market. Further, because the stochastic discount factor makes capital investment more procyclical, financial...

We study the effect of financial constraints on risk and expected returns by extending the investment-based asset pricing framework to incorporate retained earnings, debt, costly external equity, and collateral constraints on debt capacity. Quantitative results show that more financially...

We take a simple q-theory model and ask how well it can explain external financing anomalies, both qualitatively and quantitatively. Our central insight is that optimal investment is an important driving force of these anomalies. The model simultaneously reproduces procyclical equity issuance...

We document a new stylized fact regarding the term-structure of futures volatility. We show thatthe relation between the volatility of futures prices and the slope of the term structure of prices isnon-monotone and has a %u201CV-shape%u201D'. This aspect of the data cannot be generated by basic...

In a model with irreversible capacity investments, we show that financial statements prepared under replacement cost accounting provide investors with sufficient information for equity valuation purposes. Under alternative accounting rules, including historical cost and value in use accounting,...

Using data on over 6000 loans issued to US firms between 1990 and 2004, we find that lower takeover defenses (as proxied by lower G-index of Gompers, Ishii and Metrick (2003)) significantly increase the cost of bank loans for a firm. Firms with lowest takeover defense (democracy) pay 25% higher...