There has been a long-running debate whether stock market prices are determined by fundamentals. To date no consensus has been reached. An important issue in this debate concerns the circumstances in which deviations from fundamentals are consistent with rational behavior. A continuous-time...

There is some empirical evidence that high tax bracket investors hold the equity of unlevered firms while low tax bracket investors hold levered firms. It has been suggested that an extension of the Miller model can provide a theory which is consistent with this observation. However, it has been...

As a result of the historical importance of debt and equity, the traditional focus of inquiry into firms’ choice of capital structure has been "What is the optimal debt/equity ratio?" This approach lead to the Modigliani and Miller theorems and a large body of subsequent work but has not been...

Prior to the Securities Exchange Act of 1934, manipulation of stock prices was an issue of great concern. The Act reduced the possibilities for manipulation by, among other things, making it illegal for a manager to sell short his firm’s shares or for false information about a firm to be...

There is often a moral hazard when information is sold since anyone can claim to have superior information. This paper considers feasible and optimal strategies which allow this problem to be overcome, in the context of a standard one-period, two-asset model. It is shown that it is always better...

There is often a reliability problem when information is sold since anyone can claim to have superior knowledge. Optimal strategies which allow the seller to overcome this problem are considered in the context of a standard one-period two-asset model. It is shown that when the seller’s risk...

In this paper a theory of capital structure based on imperfections in firms' product markets is illustrated with numerical examples. In the model used there is a corporate tax advantage to debt but there are no direct bankruptcy costs. The effect of bankruptcy rather is to delay investment...

Traditional asset-pricing theories assume complete market participation, despite considerable empirical evidence that most investors participate in a limited number of markets. The authors show that once the participation decision is endogenized, market properties change dramatically. First,...

The recent crisis has underlined the importance of the interaction of financial innovations and the housing market. We consider five major innovations relevant to housing finance. These are (i) mortgages; (ii) specialised housing finance institutions; (iii) government interventions in housing...