We develop a dynamic model of financial and investment policy with corporate and individual taxes, costly equity issuance, and debt constraints. The dynamic framework allows us to explain a number of empirical findings inconsistent with static tax-based theories. We show that: 1) there is no...

What determines securitization levels, and should they be regulated? To address these questions we develop a model where originators can exert unobservable effort to increase expected asset quality, subsequently having private information regarding quality when selling ABS to rational investors....

We examine the optimal mixture and priority structure of bank and market debt using a tradeoff model where banks have the unique ability to renegotiate outside formal bankruptcy. Flexible bank debt offers a superior tradeoff between tax shields and bankruptcy costs. Ease of renegotiation limits...

We analyze callable, convertible, and callable-convertible bonds in a dynamic model with restructuring, taxation, and transaction/bankruptcy costs. In this setting, calling when conversion value equals call price is not generally optimal. Late (early) calls are optimal when the conversion ratio...

In the context of an infinitely-repeated principal-agent problem with hidden information, I examine the effect of long-term debt on implicit (relational) contracts between the firm and employees/suppliers. Implicit contracts rely on the promise of future surplus as an incentive for parties to...

In a static setting, Green (1984) shows that a warrant contract can eliminate the asset substitution problem created by debt. In contrast, we show that when the firm chooses volatility dynamically, no warrant can eliminate asset substitution, as equity is always risk-loving when the firm is near...

We examine optimal provision of riskless government bonds under asymmetric information and safe asset scarcity. Paradoxically, corporations have incentives to issue junk debt precisely when intrinsic demand for safe debt is high since uninformed investors then migrate to risky overheated debt...

In recent years, policy experiments using large microeconomic datasets have gained ground in macroeconomics. Imposing rational expectations, we examine robustness of evidence derived from ideal natural experiments applied to atomistic agents in dynamic settings. Paradoxically, once experimental...

We develop a theory of primary market discounts demanded by ex ante identical strategic uninformed investors facing heterogeneous carrying cost realizations. Such investors demand primary market discounts equaling expected secondary market trading losses plus carrying costs. Security design is...

Random assignment is insufficient for measured treatment responses to recover causal effects (comparative statics) in dynamic economies. We characterize analytically bias probabilities and magnitudes. If the policy variable is binary there is attenuation bias. With more than two policy states,...