The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk asserts. We show that this undermines the traditional result that high capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an...

Corporate limited liability tends to make firms under-value the possibility that their actions will have extremely bad outcomes. This distortion has been a particular focus for banking firms because their equity capital ratios are low and the government has an interest in assuring a stable...

Because the personal tax treatments of interest and dividend income likely affect the relative cost of debt and equity financing, a sharp change in tax treatment could affect firms' optimal leverage. This paper examines the effect of the 2003 equity income tax cut on firms' debt usage. Because...

As the recent financial crisis unfolded, a new financial instrument -- contingent capital (“coco”) bonds -- was widely considered as a mechanism for promptly re-capitalizing over-levered financial institutions. Essentially, coco bonds would replace supervisory discretion about banks' capital...

We evaluate U.S. firms' leverage determinants by studying how 1,801 firms paid for 2,073 very large investments during the period 1989-2006. This approach complements existing empirical work on capital structure, which typically estimates regression models for a broad set of CRSP/Compustat...

The Basel framework has produced complex definitions of “adequate” capital, expressed in terms of book (accounting) ratios. However, solvency actually depends not on accounting ratios but on private investors' valuation of the firm's assets' and liabilities' market values. At large banking...

The rapid increase in U.S. house prices during the 2001--2006 period was accompanied by a historically rapid expansion of bank assets. We exploit cross-regional variation in local housing booms to study how housing demand shocks affected the growth of the banking sector. We estimate the effect...