We show theoretically that optimism can lead a risk-averse CEO to choose the first-best investment level that maximizes shareholder value. Optimism below (above) the interior optimum leads the CEO to underinvest (overinvest). Hence, if boards of directors act in the interests of shareholders,...

We show theoretically that optimism can lead a risk-averse Chief Executive Officer (CEO) to choose the first-best investment level that maximizes shareholder value. Optimism below (above) the interior optimum leads the CEO to underinvest (overinvest). Hence, if boards of directors act in the...

We study the consumption-portfolio problem of a capital gain taxed investor who has access to multiple risky stocks. Primary to our analysis is to understand how costly short selling influences portfolio choice with a shorting the box restriction. Our analysis uncovers two different strategies...

We study the consumption-portfolio problem of a capital gain taxed investor who has access to multiple risky stocks. Primary to our analysis is to understand how costly short selling influences portfolio choice with a shorting the box restriction. Our analysis uncovers two different strategies...

We study the effects of a market-wide short-sale constraint in a dynamic economy with heterogeneous beliefs. Imposing the constraint reduces the stock price if the optimistic investors' intertemporal elasticity of substitution (IES) is less than one and increases the stock price if the...

In a setting where the lender and the borrower have heterogeneous beliefs about the likelihood of a disastrous shock to the borrower's economy, we revisit the debt contract proposed by Barro (2006). We find that a higher belief by the lender compared to the borrower can lead to countercyclical...

We provide a detailed characterization of arbitrage-free asset prices in the presence of capital gains and income taxes. The distinguishing feature of our analysis is that we impose on the model two important features of the tax code: the limited use of capital losses and the inability to wash...

We explore the bond-pricing implications of an exchange economy where (i) preference shocks result in time-varying term premiums in real yields, and (ii) a monetary policy Taylor rule determines inflation and nominal term premiums. A calibrated version of the model matches the observed term...

We study portfolio choice with multiple stocks and capital gain taxation assuming that capital losses can only offset current or future realized capital gains. We show through backtesting, using empirical distributions, that optimal equity holdings over an extended period are significantly lower...