We analyze the design and renegotiation of covenants in debt contracts as a specific example of the contractual assignment of property rights under asymmetric information. Specifically, we consider a setting where managers are better informed than lenders regarding potential transfers from debt...

We develop an agency model of financial contracting. We derive long-term debt, a line of credit, and equity as optimal securities, capturing the debt coupon and maturity; the interest rate and limits on the credit line; inside versus outside equity; dividend policy; and capital structure...

Agency problems limit firms' access to capital markets, curbing investment. Firms and investors seek contractual ways to mitigate these problems. What are the implications for investment? We present a theory of a firm's investment dynamics in the presence of agency problems and optimal long-term...

We present a rational general equilibrium model that highlights the fact that relative wealth concerns can play a role in explaining financial bubbles. We consider a finite-horizon overlapping generations model in which agents care only about their consumption. Though the horizon is finite,...

I show that when an issuer has superior information about the value of its assets, it is better off selling assets separately rather than as a pool due to the information destruction effect of pooling. If, however, the issuer can create a derivative security that is collateralized by the assets,...

We study market efficiency in an infinite-horizon model with a monopolistic insider. The insider can trade with competitive market makers and noise traders, and observes privately the expected growth rate of asset dividends. In the absence of the insider, this information would be reflected in...

We analyze how asymmetric information and imperfect competition affect liquidity and asset prices. Our model has three periods: Agents are identical in the first, become heterogeneous and trade in the second, and consume asset payoffs in the third. We show that asymmetric information in the...

We propose a theory of momentum and reversal based on flows between investment funds. Flows are triggered by changes in fund managers' efficiency, which investors either observe directly or infer from past performance. Momentum arises if flows exhibit inertia, and because rational prices...

We propose a clientele-based model of the yield curve and optimal maturity structure of government debt. Clienteles are generations of agents at different lifecycle stages in an overlapping-generations economy. An optimal maturity structure exists in the absence of distortionary taxes and...

In this article we study the effects of transaction costs on asset prices. We assume an overlapping generations economy with a riskless, liquid bond, and many risky stocks carrying proportional transaction costs. We obtain stock prices and turnover in closed form. Surprisingly, a stock's price...