We show that when borrowers are privately informed about their creditworthiness and lenders have a soft budget constraint, efficient investment requires a limit on the fraction of a firm’s cash flows that can be pledged to outsiders. That is, pledgeability should neither be too low nor too...

In this paper, we provide a unified framework for analyzing competitive markets with adverse selection. The key feature of our model is that whether the suppliers of the contracts (uninformed) are committed to the contracts they offer or not is determined endogenously. Because of the endogeneity...

We develop a theoretical model to explain why some issues of convertible bonds include a call feature whereas others do not and then test the predictions of the model empirically. The reasoning in the model is that good firms do not need a call feature and therefore issue straight debt or...

This study applies the panel convergence methodology developed by Philips and Sul (2007) on the debt maturity ratios of a set of firms in developed economies, to explore the effects of credit market integration on debt maturity choices. In contrast to prior studies, our methodology allows for a...

We show that short-term debt in a firm’s optimal capital structure reduces investment under asymmetric information. Investors’ interpretation of underinvestment as a positive signal about the quality of the assets in place allows the equity holders to profit from short-term debt repricing at...