Banks and related financial institutions often have two separate subsidiaries that make loans of similar type but differing risk, for example, a bank and a finance company, or a "good bank/bad bank" structure. Such "bipartite" structures may prevent risk shifting, in which banks misuse their...

This paper models the optimal choice of shareholder liability. If investors want managers to be monitored, the monitors should be residual claimants (shareholders), and monitoring and firm value will increase as shareholders commit more of their wealth to the firm. When liquidating wealth is...

Theory suggests that banks' private information about borrowers lets them hold up borrowers for higher interest rates. Since hold-up power increases with borrower risk, banks with exploitable information should be able to raise their rates in recessions by more than is justified by borrower risk...

An institution holding shares in a firm can use information about the firm both for trading ("speculation") and for deciding whether to intervene to improve firm performance. Intervention increases the value of the institution's existing shareholdings, but intervention only increases the...

Although monitoring borrowers is thought to be a major function of financial institutions, the presence of other claimants reduces an institutional lender's incentives to do this. Thus loan contracts must be structured to enhance the lender's incentives to monitor. Covenants make a loan's...

We examine how a firm's incentive to commit fraud when going public varies with investor beliefs about industry business conditions. Fraud propensity increases with the level of investor beliefs about industry prospects but decreases when beliefs are extremely high. We find that two mechanisms...

We propose a theory of mergers that combines managerial merger motives with an industry-level regime shift that may lead to value-increasing merger opportunities. Anticipation of these merger opportunities can lead to defensive acquisitions, where managers acquire other firms to avoid losing...

Trading losses associated with information asymmetries can be mitigated by designing securities that split the cash flows of underlying assets. These securities, which can arise endogenously, have values that do not depend on the information known only to informed agents. Bank debt (deposits) is...