This paper investigates the effect of fund managers' performance evaluation on their asset allocation decisions. We derive optimal contracts for delegated portfolio management and show that they always contain relative performance elements. We then show that this biases fund managers to deviate...

We model the interplay between cash and debt policies in the presence of financial constraints. While saving cash allows financially constrained firms to hedge future investment against income shortfalls, reducing current debt (saving debt capacity) is a more effective way to boost investment in...