This article addresses the problem faced by a regulated natural monopolist who must raise outside funds to finance socially desirable projects. We demonstrate that fair rate of return utility price regulation will lead to underinvestment incentives in the presence of asymmetric information...

Under asymmetric information regarding the quality of investment opportunities and a tax advantage to debt, it is demonstrated that a separating equilibrium in which higher-quality firms issue equity and lower-quality firms issue debt may exist. Thus, the ‘pecking order’ theory may break...

Researchers have argued that financial distress costs and corporate tax shields can induce value-maximizing corporations to hedge their operating cash flows. We demonstrate that, for a fixed level of debt in the capital structure, the presence of personal income taxation and corporate non-debt...

This paper considers a problem in which an agent is hired to manage a capital investment and subsequently receives private information regarding the productivity of the capital investment. The capital manager must decide whether to invest capital supplied by the firm (the principal), or to...

In this paper, we examine acquisitions of two financially distressed retailers-Federated's takeover of Macy's, and Zell Chilmark's takeover of Carter Hawley Hale. In both cases the raider purchased some of the target's outstanding debt to launch its takeover attempt. These debt purchases appear...

In this article, the authors show that the evolution of managerial entrenchment can distort investment horizons. Both myopic and hypermetropic distortions can arise. The direction of these distortions is determined by the locus of control and their pervasiveness by the degree of management...

We examine auction design in a context where symmetrically informed adaptive agents with common valuations learn to bid for a good. Despite the absence of private valuations, asymmetric information, or risk aversion, bidder strategies do not converge to the Bertrand–Nash equilibrium strategies...

This paper documents the short- and long-term balance sheet effect of cash flows. We show that cash savings in the short run and debt reduction in both the short and the long run account for a substantial fraction of cash flow use. Although, in the long run, investment exhibits substantial...

I model the determination of management compensation through the strategic interaction among outside shareholders, managers, and corporate boards. The board sets both regular incentive compensation and discretionary special compensation unrelated to performance. We show that shareholder value...

This paper develops a new theory of multinational capital structure based on legal-system arbitrage: The optimal capital structure for the multinational minimizes the value of the ex post opportunism options created by the diverse legal systems under which the multinational operates. This theory...