We study investment options in a dynamic agency model. Moral hazard creates an option to wait and agency conflicts affect the timing of investment. The model sheds light, theoretically and quantitatively, on the evolution of firms' dynamics, in particular the decline of the failure rate and the...

Can inertia in terminating unsuccessful loans (creditor passivity) be due to the multiplicity of lenders in loan arrangements? Can a lender reschedule, betting against his odds? Private information in the form of bad but coarse news, that would prompt foreclosure on its own, will instead lead to...

Can debt rescheduling decisions differ in multiple lenders’ versus a single lender loan? Do multiple lenders efficiently react to information? We show that the precision of information plays an essential role. Foreclosing by one lender is disruptive so that a lender can rationally wait for the...

XVA is a material component of a trade valuation and hence it must impact the decision to exercise options within a given netting set. This is true for both unsecured trades and secured/cleared trades where KVA and MVA play a material role even if CVA and FVA do not. However, this effect has...

We develop a main bank model where the main bank decides whether or not to raise additional funds from the capital market to continue to invest in a borrowing firm when nonmain banks withdraw funds. We show that the threat of withdrawal of nonmain banks is more likely not only to force the main...

We consider the role of the nonrecourse financing of securitization by a financial institution (FI). Our model suggests that even though the FI has the opportunity to provide liquidity support afterward, it is optimal for the FI to use the nonrecourse financing of securitization initially,...

Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties and borrow with the option to default against their future cash ow. A variety can die with a constant probability, implying that bigger firms (those with...

With the help of lab experiments we study the impact of discharging insolvent debtors of their residual debt. We investigate the impact of different participation rules and the impact of different types of lenders. We find that higher participation rates encourage risk taking behaviour of...

Micro-entrepreneurs in emerging markets often rely on informal lenders for their routine borrowing needs. This paper investigates micro-entrepreneurs' and informal lenders' incentives to participate in a lender-borrower relationship in a market in which repayments are neither law-protected nor...