This paper studies stylised markets with asymmetric information. When the market is modelled as a standard signalling game, inefficient outcomes arise due to the arbitrariness of off-the-equilibrium path beliefs. Such inefficient outcomes are shown not to arise in a novel game that combines...

We investigate whether the mix of financial covenants in debt contracts allows lenders to screen borrowers based on their private information about their future risk-taking intentions. Consistent with adverse selection theories, we predict and find that borrowers with greater risk-taking...

Shareholder perks are in-kind gifts or purchase discounts that disproportionately reward small shareholders. Data from Japanese firms indicate that firms initiating perk programs attract individual retail shareholders and experience increases in share values. We find support for three channels...

We develop a dynamic structural model of stock splits, in which managers can signal their private information though the timing of the split decisions. Our approach is consistent with the empirical evidence that shows that the majority of stock splits have 2:1 ratio but are announced at various...

We develop a behavioral theory of real options that relaxes the informational and behavioral assumptions underlying applications of financial options theory to real assets. To do so, we augment real option theory's focus on uncertain future asset values (prospective uncertainty) with feedback...

Numerous academic studies have shown that asset allocation is the single most important determinant of portfolio returns. We accept this premise but note that an optimal asset allocation strategy must still be determined based on dynamic conditions. Using the principles of intermarket analysis...

Previous research has emphasized the portfolio balance effects of Federal Reserve bond purchases, in which a reduced bond supply lowers term premia. In contrast, we find that such purchases have important signaling effects that lower expected future short-term interest rates. Our evidence comes...

Managing uncertainty is critical for the survival, growth, and profitability of service firms. Despite its importance, the extant literature largely ignores how firms respond to service uncertainty. To address this gap, this study develops and tests a conceptual model of uncertainty by...

We examine how shareholders' trust in managers is affected by (1) the outcome of earnings management (inconsistent vs. consistent with shareholders' interests) and (2) the method of earnings management (accruals vs. real methods). Using a controlled experiment, we predict and find that trust is...

A widespread view in the ‘political budget cycles' literature is that incumbent politicians seek to influence voters' perceptions of their competence and/or preferences by using the composition of the fiscal budget as a signalling tool. However, little is known about whether voters actually...