This paper examines the interplay between the real and financial decisions of the competitive firm `a la Sandmo. Besides output price uncertainty, the firm faces additional sources of risk which are aggregated into an additive background risk. We show that the firm always chooses its optimal...

This paper examines the interplay between the real and financial decisions of the competitive firm `a la Sandmo. Besides output price uncertainty, the firm faces additional sources of risk which are aggregated into an additive background risk. We show that the firm always chooses its optimal...

This paper examines the optimal capital structure of a firm that delegates its financing decision of a risky project to a manager who is both risk averse and regret averse. Regret aversion is characterized by a utility function that includes disutility from having chosen ex-post suboptimal...