Corporate Finance

In this chapter, Kenneth Ayotte and Patrick Bolton model the role that mandatory standardization plays in reducing the costs of financial contracting and improving liquidity. In particular, they identify opportunities for financial contractors to appropriate value from unknowing third parties and show that rules that standardize contracts can serve as a commitment device against such demand-dampening pitfalls facing these other parties. Mandatory standardization thereby can improve the liquidity of secondary markets from loan contracts.

Will Rogers, commenting on the Depression, famously quipped: "If stupidity got us into this mess, why can't it get us out?" Rogers's rhetorical question has an obvious answer: persistent stupidity fails to recognize prior errors and, therefore, does not correct them. For three decades, many financial economists have been arguing that there are deep flaws in the financial policies of the U.S.

We analyze contagious sovereign debt crises in financially integrated economies. Under financial integration banks optimally diversify their holdings of sovereign debt in an effort to minimize the costs with respect to an individual country"s sovereign debt default. While diversification generates risk diversification benefits ex ante, it also generates contagion ex post. We show that financial integration without fiscal integration results in an inefficient equilibrium supply of government debt.

As the subprime mortgage market flourished in the 1990s, innovative lenders turned to a new type of loan: the 2/28 mortgage, designed to allow borrowers with less-than-ideal credit to buy a home and to repair their credit histories. This mortgage offered a fixed two-year "teaser" rate, followed by 28 years of payments that would adjust according to market rates such as LIBOR. As an example shows, the teaser rate was relatively affordable, but when the adjustable rate kicked in, borrowers might see their monthly payments eventually increase by as much as 50 percent.

Building on his expertise in macroeconomic policymaking at the Federal Reserve, Mishkin's Macroeconomics: Policy and Practice text clearly provides a theoretical framework that illustrates the most current and relevant policy debates in the field.

The financial crisis of 2007 to 2009 can be divided into two distinct phases. The first and more limited phase from August 2007 to August 2008 stemmed from losses in one relatively small segment of the U.S. financial system — namely, subprime residential mortgages. Despite this disruption to financial markets, real GDP in the United States continued to rise into the second quarter of 2008, and forecasters were predicting only a mild recession. In mid-September 2008, however, the financial crisis entered a far more virulent phase.

This paper documents that intermediaries play an important role in facilitating international trade. We modify a heterogeneous firm model to allow for an intermediary sector. The model predicts that firms will endogenously select their mode of export-either directly or indirectly through an intermediary-based on productivity. The model also predicts that intermediaries will be relatively more important in markets that are more difficult to penetrate.

A major governance problem in closely-held corporations arising from the illiquidity of shares is the majority shareholders' expropriation of minority shareholders. As a solution, legal and finance research recommends that the main shareholder surrender some control to minority shareholders via ownership rights. We test this proposition on a large dataset of closely-held corporations. We find that shared-ownership firms report substantially larger return on assets (up to 14 percentage points) and lower expense-to-sales ratios.