This paper explores the practice of mortgage refinancing in a dynamic competitive lending model with risky borrowers and costly default. We show that prepayment penalties improve welfare by ensuring longer-term lending contracts, which prevents the mortgage pools from becoming disproportionately...

We consider optimal incentive contracts when managers can, in addition to shirking or diverting funds, increase short term profits by putting the firm at risk of a low probability "disaster." To avoid such risk-taking, investors must cede additional rents to the manager. In a dynamic context,...

We develop a tractable general equilibrium framework of housing and mortgage markets with aggregate and idiosyncratic risks, costly liquidity and strategic defaults, empirically relevant informational asymmetries, and endogenous mortgage design. We show that adverse selection plays an important...

We examine the relation between CEOs' equity incentives and their use of performance-sensitive debt contracts. These contracts require higher or lower interest payments when the borrower's performance deteriorates or improves, thereby increasing expected costs of financial distress while also...

We develop a tractable general equilibrium framework of housing and mortgage markets with aggregate and idiosyncratic risks, costly liquidity and strategic defaults, empirically relevant informational asymmetries, and endogenous mortgage design. We show that adverse selection plays an important...

We analyze how Dodd-Frank mandated risk retention affects the information investors extract from issuers' retention choices in the CMBS market. We show that the required retention level is both binding and stringent. Although this implies issuers cannot signal using the level of retention, we...

We examine the relation between CEOs equity incentives and their use of performance-sensitive debt contracts. These contracts require higher or lower interest payments when the borrower's performance deteriorates or improves, thereby increasing expected costs of financial distresswhile also...

Initial proposals for bank contingent convertibles (CoCos) envisioned that these bonds would convert to new equity when the bank's stock price declined to a pre-specified trigger, thereby automatically re-capitalizing the bank and enhancing financial stability. However, subsequent research...

This paper provides a formal model of contingent convertible bonds (CCBs), debt instruments that automatically convert to equity if and when the issuing firm or bank reaches a specified level of financial distress. We develop closed-form solutions for the value of CCBs with market-based...

This paper studies optimal security design in a dynamic setting with an agency problem that arises when an agent in charge of a project can divert cash flows for his own consumption at the expense of an outside investor. Cash flows are unobservable and unverifiable by the outside investor, who...