This article studies an asymmetric information game with "type convergence," in which, under some realizations of a common uncertainity, inducing informed agents to reveal their types through self-selection by contract choice is either costly or impossible. Under other realizations,...

The authors show that the incentive for managers to build their reputations distorts firms' investment policies in favor of relatively safe projects, thereby aligning managers' interests with those of bondholders, even though managers are hired and fired by shareholders. This effect opposes the...

This article builds a theory of financial system architecture. We ask: what is a financial market, what is a bank, and what determines the economic role of each? Starting with basic assumptions about primitives--the types of agents and the nature of the informational asymmetries--we provide a...

We explore the implications of financial system design for financial innovation. We begin with assumptions about the investment opportunities of firms, their observable attributes, and the roles of commercial banks, investment banks, and the financial market. We examine the borrower's choice...

We formally examine the role of litigation risk in initial public offering (IPO) pricing. The underwriter's pricing decision trades off current revenue against expected future litigation costs, both of which are increasing in the IPO price. Given a time-consistency constraint and rational...

In this article we ask: what kind of information and how much of it should firms voluntarily disclose? Three types of disclosures are considered. One is information that complements the information available only to informed investors (to-be-processed complementary information). The second is...