This article presents a theory of capital allocation that shows how the use of net present value (NPV) as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria, like the internal rate of return and the...

Three major motives have been suggested for takeovers: synergy, agency, and hubris. Existing empirical evidence is unable to clearly distinguish among these motives probably due to the simultaneous existence of all three in any sample of takeovers. This paper suggests a way of distinguishing...

In an incomplete contracting environment, bankruptcy is considered to be a renegotiation of the firm's financial contracts. An optimal bankruptcy law is derived as optimal restrictions on the environment within which the claimants to a distressed firm bargain. The law is used as a commitment...

The role of the medium of exchange in competition among bidders and its effect on returns to stockholders in corporate takeovers are investigated. Consistent with recent empirical evidence, our model shows that stockholders of both acquiring and target firms obtain higher returns when a takeover...

We develop a model of the acquisition market in which the acquirer has a choice between two takeover mechanisms: mergers and tender offers. A merger is modeled as a bargaining game between the acquiring and target firms; whereas a tender offer is modeled as an auction in which bidders arrive...

We study the design of internal control and capital structure. We pose the question, When is control allocated only to shareholders and when is it allocated to other stakeholders, such as debtholders, or the management team? We show that shareholders (debtholders) get control when the firm's...

Aggregate data exhibit procyclical movement in the rate of turnover. However, existing models of turnover have been unable to explain this phenomenon. In this model the author generates turnover as an outcome of a second-best wage contract when there is asymmetry of information about workers'...