Traditional finance theory holds that managers with option-laden incentive contracts may favor equity at the expense of debt. However, once options vest, managers may directly influence the degree to which their personal fortunes are tied to their firms by deciding whether or not to exercise...

Authority often relies on information whose collection and transmission by subordinates its very exercise discourages. In this paper, we study how the allocation of authority affects the production, transmission, and strategic use of subjective intelligence relying on exhaustive data on credit...

This is a basic introduction on the money (or cash) generation applying the second law of thermodynamics. As the result of any economic process we observe an increase of the entropy of the magnitude of the value added. Based on this relation it is possible to calculate the necessary money...

This article presents a stress-testing model for liquidity risks of banks. It takes into account the first- and second-round (feedback) effects of shocks, induced by reactions of heterogeneous banks, and reputation effects. The impact on liquidity buffers and the probability of a liquidity...

This paper proposes a form of contingent capital for financial institutions that converts from debt to equity if two conditions are met: the firm's stock price is at or below a trigger value and the value of a financial institutions index is also at or below a trigger value. This structure...

We investigate the trade-off between incentive provision and inefficient rollover freezes for a firm financed with staggered short-term debt. First, debt maturity that is too short-term is inefficient, even with incentive provision. The optimal maturity is an interior solution that avoids...

We consider three measures on the systemic importance of a financial institution within a interconnected financial system. Based on the measures, we study the relation between the size of a financial institution and its systemic importance. From both theoretical model and empirical analysis, we...

We make an attempt to discover the statistically significant relationship between market discipline and banking system transparency using the cross-country data (1990-2003). The dependent variables cover the quantitative and price-based disciplining. Measuring banking system transparency we use...

In his basic model of debt renegotiation, Bester (1994) argues that collateral is more effective if high risk projects are financed. This result, however, cru-cially depends on the definition of risk. Using the second-order stochastic dominance criterion introduced by Rothschild and Stiglitz...

This paper suggests a model based on Poisson processes to estimate joint credit losses without the limitations of normality assumptions and non-negative correlation. Idiosyncratic and systematic risks are seen as “shocks” and defaults are driven by a latent variable (loans' lifetimes). The...