Corporate Finance

We consider the optimal design of mortgage-backed securities (MBS) in a dynamic setting in which a mortgage underwriter with limited liability can engage in costly hidden effort to screen borrowers and can sell loans to investors. We show that (i) the timing of payments to the underwriter is the key incentive mechanism, (ii) the maturity of the optimal contract can be short, and that (iii) bundling mortgages is efficient as it allows investors to learn about underwriter effort more quickly, an information enhancement effect.

I investigate the contribution of pharmaceutical innovation to recent longevity growth in Germany and France. First, I examine the effect of the vintage of prescription drugs (and other variables) on the life expectancy and age-adjusted mortality rates of residents of Germany, using longitudinal, annual, state-level data during the period 2001–2007. The estimates imply that about one-third of the 1.4-year increase in German life expectancy during the period 2001–2007 was due to the replacement of older drugs by newer drugs.

Based on a sample of highly leveraged Austrian ski hotels undergoing debt restructurings, we show that reducing a debt overhang leads to a significant improvement in operating performance. Changes in leverage in the debt restructurings are instrumented with Unexpected Snow, which captures the extent to which a ski hotel experienced unusually good or bad snow conditions prior to the debt restructuring.

We study economies of asymmetric information with observable types. Trade takes place in lotteries. Individuals face a standard budget constraint, while the incentive compatibility constraints are imposed on the production set of the intermediaries. This formalization encompasses moral hazard and private information economies. Equilibrium allocations are constrained efficient, but, contrary to what stated for example in Jerez (2005), the set of equilibrium allocations may be empty and the Second Welfare Theorem may fail. This happens for two reasons.

This paper argues that there is a Coasean Bargain available to banks, Long-term Investors, and Bank Regulators around a particular form of "Contingent Capital." By purchasing rights to issue equity in crisis events at a pre-specified price from Long-term Investors, banks can ensure that they will have sufficient regulatory capital available when they need it most: in a crisis. By selling these rights (effectively, a form of crisis insurance) long-term investors can monetize their counter-cyclical investments strategies in banks and, thus, obtain an adequate return as long-term investors.

This paper discusses some existing and potential roles of financial reporting disclosures. The focus is on what are conventionally termed mandatory disclosures, although as Sunder (1997) points out the distinction between mandatory and voluntary is somewhat arbitrary. The paper views disclosure through the lens of incentives. Accounting disclosures are a component of the broad set of information shareholders, debt holders, and other accountees have to assess the stewardship of accountors.

Price momentum strategies have historically generated high positive returns with little systematic risk. However, these strategies also experience infrequent but severe losses. During 13 of the 978 months in our 1929–2010 sample, losses to a US-equity momentum strategy exceed 20 percent per month. We demonstrate that a hidden Markov model in which the market moves between latent "turbulent" and "calm" states in a systematic stochastic manner captures these high-loss episodes.

Government officials, policy analysts, practitioners, and academics from diverse perspectives across the globe have enthusiastically endorsed the promise of public-private engagement to solve pressing problems of public policy.  The endorsement often is a rallying cry for a change in policy or reform of a prevailing policy regime.  In theory and practice, the idea of public-private (PP) blurs prevailing distinctions between roles and actions traditionally considered properly “public” and those roles and actions conventionally considered properly “private.”  It signifies a shi