This paper proposes a simple analysis for examining an agent's optimal decisions in a principal-agency problem. Unlike the standard approach, the target firm's expected return and risk are modeled as a parametric curve in terms of a critical business decision. A general condition is derived for...

We derive equilibrium asset prices when fund managers deviate from benchmark indices to exploit noise-trader induced distortions but fund investors constrain these deviations. Because constraints force managers to buy assets that they underweight when these assets appreciate, overvalued assets...

Many financial arrangements reference market prices that are yet to be realized at the time of contracting and consequently susceptible to manipulation. Two of the most common such arrangements are: (i) market-on-close contracts, which reference the price prevailing at the end of an execution...

We analyze investment decisions when information is costly, with and without delegation to an agent. We use a rational-inattention model and compare it with a canonical signal-extraction model. We identify three "investment conditions". In "sour" conditions, no information is acquired and no...

We study the problem of an investor that buys an equity stake in an entrepreneurial venture, under the assumption that the former cannot monitor the latter’s operations. The dynamics implied by the optimal incentive scheme is rich and quite different from that induced by other models of...

Private equity fund managers are typically required to invest their own money alongside the fund. We examine how this coinvestment affects the acquisition strategy of leveraged buyout funds. In a simple model, where the investment and capital structure decisions are made simultaneously, we show...

In this paper I analyze a simple example of a debt contract based on an extension of the debt overhang problem. I assume incomplete contracts and introduce the possibility of refinancing an existing debt by an outside investor. Although the refinancing is never implemented in the equilibrium, it...

This study analyzed the principal-agent problem, in which the agent performs risk management tasks, and considered the cost minimization problem of the principal, the objective of which is to design the cheapest contract inducing a target effort. Our results confirm that a one-step bonus...

We study the problem of an investor that buys an equity stake in an entrepreneurial venture, under the assumption that the former cannot monitor the latter's operations. The dynamics implied by the optimal incentive scheme is rich and quite different from that induced by other models of repeated...

We examine the effectiveness of debt covenants in alleviating financial agency problems. Distortions in both investment and financing policies with long--term debt are captured in a structural dynamic model where both policies are endogenously determined by shareholders. The combined and...