We examine the impact of ambiguity, or Knightian uncertainty, on the capital structure decision, using a static tradeoff theory model in which agents are both ambiguity and risk averse. The model provides the well-known result that greater risk---the uncertainty over outcomes---leads firms to...

We examine the importance of ambiguity, or Knightian uncertainty, in the capital structure decision. We develop a static tradeoff theory model in which agents are both risk averse and ambiguity averse. The model confirms the usual idea that increased risk—the uncertainty over known possible...

A Principal-Agent model in which the principal and the agent are ambiguity averse is examined. A novel role for the optimal contract is to induce a speci c partition of the state space for the agent as a means of manipulating the ambiguity he faces, thereby providing more efficient contracting....

The new issues market is used to examine the impact of ambiguity and ambiguity aversion on the pricing of financial assets. An IPO process is modeled assuming ambiguity regarding the returns on financial assets and risk and ambiguity aversion on the part of agents. Theoretically, the underwriter...

There are two phenomena in behavioral finance and economics which are seemingly unrelated and have been studied separately; overconfidence and ambiguity aversion. In this paper we are trying to link these two phenomena providing a theoretical foundation supported by evidence from an experimental...

Ordering alternatives by their degree of ambiguity is a crucial element in decision-making processes in general and in asset pricing in particular. Thus far the literature has not provided an applicable measure of ambiguity allowing for such ordering. The current paper addresses this need by...

Assuming that probabilities (capacities) of events are random, this paper introduces a novel model of decision making under ambiguity, called Shadow probability theory, a generalization of the Choquet expected utility. In this model, probabilities of observable events in a subordinated...

With a focus on risk, classical portfolio theory assumes that probabilities of future outcomes are known. In reality, however, there is ambiguity in these probabilities. This paper studies the nature of the relationship between risk and ambiguity and proves that in most cases ambiguity cannot be...