A fundamental role of financial markets is to gather information on firms' investment opportunities, and so help guide investment decisions. In this paper we study the incentives for information production when prices perform this allocational role. If firms cancel planned investments following...

A fundamental role of financial markets is to gather information on firms' investment opportunities, and so help guide investment decisions in the real sector. We argue in this paper that firms' overinvestment is sometimes necessary to induce speculators in financial markets to produce...

We address the issue of investors' asset allocation decisions when portfolio management is delegated to an agent. Contrary to predictions from traditional financial theory, it is shown that investors may not induce their manager to allocate funds to the asset with the highest return. Instead...

In this paper we address the question as to why fund managers may trade on short-term information in a financial market that offers more profitable trading on long-term information. We consider a setting in which a fund manager's ability is unknown and an investor uses performance observations...

We develop a theory of sovereign borrowing where default penalties are not implementable. We show that when debt is held by both domestic and foreign agents, the median voter might have an interest in serving it. Our theory has important practical implications regarding a) the role of financial...

This paper argues that the legacy potential of a firm's strategy is an important determinant of CEO compensation, turnover and strategy change. A legacy makes CEO replacement expensive, because firm performance can only partially be attributed to a newly employed manager. Boards may therefore...

In this paper we show that profitable market manipulation via trade is possible if prices perform an allocational role. If market prices affect the real value of an asset (e.g. because they contain information relevant to a firm's investment decisions), a potentially informed speculator may wish...

We show that the amount of information in equilibrium increases in the expected profitability of the firm’s investments, and that this creates an amplification mechanism from changes in fundamentals to real value. Uncertainty about future performance has a non-trivial effect on information...

A fundamental role of financial markets is to gather information on firms’ investment opportunities, and so help guide investment decisions in the real sector. We argue in this paper that firms’ overinvestment is sometimes necessary to induce speculators in financial markets to...

It is commonly believed that prices in secondary financial markets play an important allocational role because they contain information that facilitates the efficient allocation of resources. This paper identifies a limitation inherent in this role of prices. It shows that the presence of a...