We model the vulnerability of an economy to a financial crisis as arising from the interaction of the degree of economic specialization and the intermediated financing of the investment opportunities. The probability of a financial crisis is shown to increase in the degree of economic...

This paper examines the relationship between investor protection and corporate insiders' incentive to take value-enhancing risks. In a poor investor protection environment corporations are often run by entrenched insiders who appropriate considerable corporate resources as personal benefits....

In a setting where corporate investment imposes positive externalties, the social impact of corporations depends on the sharing rule between the owners of the corporation and non-financial claimants. We examine the role of law and organizational form in altering the sharing rule. Since the legal...

We study how the investor protection environment affects corporate managers' incentives to take value-enhancing risks. In our model, the manager chooses higher perk consumption when investor protection is low. Since perks represent a priority claim held by the manager, lower investor protection...

We analyze the impact of option trading and margin rules on the behavior of informed traders and on the microstructure of stock and option markets. In the absence of binding margin requirements, the introduction of an options market causes informed traders to exhibit a relative trading bias...

This paper studies how collateral affects bond yields. Using a large dataset of public bonds, we document that collateralized debt has higher yield than general debt, after controlling for credit rating. Our model of agency problems between managers and claimholders explains this puzzling result...

This paper examines the incentive features of top-management compensation in the banking industry. Economic theory suggests that the compensation structures for bank management should have low pay-performance sensitivity because of the high leverage of banks and the fact that banks are regulated...

We show that concentrating bank regulation on bank capital ratios may be ineffective in controlling risk-taking. We propose, instead, a more direct mechanism of influencing bank risk-taking incentives, in which the FDIC insurance premium scheme incorporates incentive features of top-management...

Recent empirical work has documented the tendency of corporations to reset strike prices on previously-awarded executive stock option grants when declining stock prices have pushed these options out-of-the-money. This practice has been criticised as counter-productive since it weakens incentives...

Corporate limited liability can create agency conflicts between the public and private sectors. The resulting distortion may induce overinvestment in risky technologies relative to the social optimum. This paper examines the role of a well-designed corporate tax structure in aligning private...