Although the direct effect of lender-of-last-resort (LOLR) facilities is to forestall the default of financial firms that lose funding liquidity, an indirect effect is to allow these firms to minimize deleveraging sales of illiquid assets. This unintended consequence of LOLR facilities manifests...

We propose a model in which better governance incentivizes managers to perform better and thus saves on the cost of providing pay for performance. However, when managerial talent is scarce, firms' competition to attract better managers reduces an individual firm's incentives to invest in...

The headline numbers appear to show that even as banks and financial intermediaries suffered large credit losses in the financial crisis of 2007-09, they raised substantial amounts of new capital, both from private investors and through government-funded capital injections. However, on closer...

Macroprudential stress tests have been employed by regulators in the United States and Europe to assess and address the solvency condition of financial firms in adverse macroeconomic scenarios. We provide a test of these stress tests by comparing their risk assessments and outcomes to those from...

Can banks maintain their advantage as liquidity providers when they are heavily exposed to a financial crisis? The standard argument - that banks can - hinges on deposit inflows that are seeking a safe haven and provide banks with a natural hedge to fund drawn credit lines and other commitments....

Capital flight associated with the onset of a financial crisis in a country is often accompanied by an inflow of capital associated with foreign direct investment (FDI). Our paper provides a theoretical framework for this puzzle, and draws wider conclusions on the welfare effects of foreign...

We consider the release of information by a firm when the manager has discretion regarding the timing of its release. While it is well known that firms appear to delay the release of bad news, we examine how external information about the state of the economy (or the industry) affects this...

We study liquidity transfers between banks through the interbank borrowing and asset sale markets when (i) surplus banks providing liquidity have market power, (ii) there are frictions in the lending market due to moral hazard, and (iii) assets are bank-specific. We show that when the outside...

This Paper solves explicitly a simple equilibrium asset pricing model with liquidity risk – the risk arising from unpredictable changes in liquidity over time. In our liquidity-adjusted capital asset pricing model, a security’s required return depends on its expected liquidity as well as on...

We study two-period pure-exchange Capital Asset Pricing Model (CAPM) economies, for given degrees of incompleteness of financial markets and given degrees of restricted participation of agents in the markets. We characterize the optimal financial market structure of this economy, as well as...