We present a continuous-time asset pricing model of the levered firm where shareholders select not only the timing but also the form of abandonment. Shareholders can walk out of the firm either by (i) defaulting on their debt obligations or (ii) selling their shares to alternative operators of...

The authors investigate optimal capital requirements in a model in which banks decide on their investment in credit scoring systems. The main result is that regulators should encourage sophisticated banks to keep their asset portfolios safe, while assets with high systematic risk should be...