We examine corporate governance effectiveness when the CEO generates project ideas and the board of directors screens these ideas for approval. However, the precision of the board's screening information is controlled by the CEO. Moreover, both the CEO and the board have career concerns that...

We build a model in which the CEO generates project ideas and the board of directors acts as an advisor to the CEO by screening these ideas for approval. However, the precision of the information with which the board screens these ideas can be partially controlled by the CEO. Moreover, both the...

This paper develops a theory in which housing prices, the capital structures of banks that make mortgage loans and the capital structures of borrowers who take these loans are all endogenously determined in equilibrium. There are four main results. First, leverage is a quot;positively...

We address a fundamental question in relationship banking: why do banks that make relationship loans finance themselves primarily with core deposits and when would it be optimal to finance such loans with purchased money? We show that not only are relationship loans informationally opaque and...

We study how financial system architecture evolves through the development of banks and financial markets. The predominant existing view is that banks and markets compete, which often contradicts actual patterns of development. We show that banks and markets exhibit three forms of interaction:...

In this paper we introduce flexibility as an economic concept and apply it to the firm's security issuance decision and capital structure choice. Flexibility is the ability to make decisions that one thinks are best even when others disagree. The firm's management values flexibility because it...

We develop an economic theory of quot;flexibilityquot;, which we interpret as the discretion or ability to make a decision that others disagree with. We show that flexibility is essentially an option for the decisionmaker, and can be valued as such. The value of the flexibility option is...

In organizations, it is often necessary to engage in costly delegation of ideas; such delegation seeks to efficiently aggregate multiple information signals. What this paper shows is that those who delegate often find it impossible to separate the evaluation of the ideas they delegate from the...

This paper examines the distortionary phenomena which occur when agents within the firm react to the organizational reality that the evaluation of the ideas that they analyze is often inseparable from the evaluation of their own ability. The commingling of the assessment of the business issue...

This paper provides an explanation for the urge of banks to merge and expand scope. We build a model where bank activities evolve over time. Due to deregulation and technological advances, new opportunities become available, but the skill needed to exploit them effectively may be unknown. Early...