In this Paper, we provide a novel rationale for credit ratings. The rationale that we propose is that credit ratings can serve as a coordinating mechanism in situations where multiple equilibria can obtain. We show that credit ratings provide a ‘focal point’ for firms and their investors. We...

In this Paper we introduce flexibility as an economic concept and apply it to the firm’s security-issuance decisions and capital structure choice. Flexibility is the ability to make decisions that one thinks are best even when others disagree. Firms value flexibility because it allows...

This paper explores the implications of financial system design for financial innovation. We begin with assumptions about the investment opportunities of firms, their observable attributes, and the roles of commericial banks, investment banks, and the financial market. We examine the borrower's...

The main purpose of this paper is to take a step towards building a theory of financial system architecture. We begin with basic assumptions about the types of primitive agents and the nature of informational asymmetries in the economy, and then provide a theory that explains which agents...

We develop a model of the banking firm that is intended to reflect contemporary trends in the evolution of banks. In particular, we focus on the effects of both interbank and capital market competition on the role of banks in funding corporations. In our model, banks can choose to provide loans...

We analyze a publicly-traded firm’s decision to stay public or go private when managerial autonomy from shareholder intervention affects the supply of productive inputs by management. We show that both the advantage and the disadvantage of public ownership relative to private ownership lie in...

In this Paper we analyse an entrepreneur/manager’s choice between private and public ownership in a setting in which management needs some ‘elbow room’ or autonomy to manage the firm optimally. In public capital markets, the corporate governance regime in place exposes the firm to...

We develop an economic theory of ‘flexibility’, which we interpret as the discretion or ability to make a decision that others disagree with. We show that flexibility is essentially an option for the decision-maker, and can be valued as such. The value of the flexibility option is decreasing...

This paper examines the determinants of organizational scale and scope, with applications to various industries, including financial services. We build a model in which new opportunities arise for firms, but the skills needed to exploit them effectively are unknown. Early investments in these...