Corporate Finance

Contingent capital, a regulatory debt that must convert into common equity when a bank's equity value falls below a specified threshold (a trigger), does not in general lead to a unique equilibrium in the prices of the bank's equity and contingent capital. Multiplicity or absence of equilibrium arises because economic agents are not allowed to choose a conversion policy in their best interests. The lack of unique equilibrium introduces the potential for price manipulation, market uncertainty, inefficient capital allocation, and unreliability of conversion.

We analyze the computational problem of estimating financial risk in a nested simulation. In this approach, an outer simulation is used to generate financial scenarios and an inner simulation is used to estimate future portfolio values in each scenario. We focus on one risk measure, the probability of a large loss, and we propose a new algorithm to estimate this risk. Our algorithm sequentially allocates computational effort in the inner simulation based on marginal changes in the risk estimator in each scenario.

We characterize the optimal mortgage contract in a continuous time setting with stochastic growth in house price and income, costly foreclosure, and a risky borrower who requires incentives to repay his debt. We show that many features of subprime loans can be consistent with properties of the optimal contract and that, when house prices decline, mortgage modification can create value for borrowers and lenders.

Beginning with Shimer (2005) and Hall(2005), a recent branch of the business cycle literature has explored the role of wage rigidity in accounting for the statistical characteristics of key labor market variables; in particular high vacancy and unemployment volatility and a high negative correlation between the two. As a further exploration, we extend the Mortensen-Pissarides structure of period-by-period Nash wage bargaining to an environment where there is labor force heterogeneity (permanently employed "insiders" and "outsiders" subject to separations) and limited asset market parti

This paper provides evidence that lenders to a firm close to distress have incentives to coordinate: lower financing by one lender reduces firm creditworthiness and causes other lenders to reduce financing. To isolate the coordination channel from lenders' joint reaction to new information, we exploit a natural experiment that made lenders' negative private assessments about their borrowers public. We show that lenders, while learning nothing new about the firm, reduce credit in anticipation of the reaction by other lenders to the same firm.

This paper examines whether firms in noncompetitive industries benefit more from good governance than do firms in competitive industries. We find that weak governance firms have lower equity returns, worse operating performance, and lower firm value, but only in noncompetitive industries. When exploring the causes of the inefficiency, we find that weak governance firms have lower labor productivity and higher input costs, and make more value-destroying acquisitions, but, again, only in noncompetitive industries.

This paper studies the asset pricing implications of Bayesian learning about the parameters, states, and models determining aggregate consumption dynamics. Our approach is empirical and focuses on the quantitative implications of learning in real-time using post World War II consumption data. We characterize this learning process and provide empirical evidence that revisions in beliefs stemming from parameter and model uncertainty are significantly related to aggregate equity returns.

Cancer drugs have become more expensive over the past few years, leading many people to question whether the treatments are really worth their high costs. But despite the sticker shock, cancer medicines have provided good value for money.

This paper investigates the question of whether so-called anomalous returns predicted by accounting numbers are normal returns for risk or abnormal returns. It does so via a model that shows how accounting numbers inform about normal returns if pricing were rational. The model equates expected returns to expectations of earnings and earnings growth, so that any variable that forecasts earnings and earnings growth also forecasts required returns if the market prices those outcomes as risky.