We analyze credit ratings' effects on firms' investments in a rational debt-financing game that features a feedback loop. The credit rating agency (CRA) inflates the rating, providing a biased but informative signal to creditors. Creditors' response to the rating affects the firm's investment...

In this paper, we review three branches of theoretical literature on financial crises. The first one deals with banking crises originating from coordination failures among bank creditors. The second one deals with frictions in credit and interbank markets due to problems of moral hazard and...

This paper develops a model of a self-fulfilling credit market freeze and uses it to study alternative governmental responses to such a crisis. We study an economy in which operating firms are interdependent, with their success depending on the ability of other operating firms to obtain...

FDI investors control the management of the firms, whereas FPI investors delegate decisions to managers. Therefore, direct investors are more informed than portfolio investors about the prospects of projects. This information enables them to manage their projects more efficiently. However, if...

We examine the choice between Foreign Direct Investment and Foreign Portfolio Investment at the level of the source country. Based on a theoretical model, we predict that (1) source countries with higher probability of aggregate liquidity crises export relatively more FPI than FDI, and (2) this...

We show that Initial Coin Offerings (ICOs) can limit rent-seeking activities of large firms with market power while preserving efficiency gains due to network effects. We model ICOs of utility tokens, which can be used to finance development of online platforms where buyers and sellers can meet...

We study a model where a capital provider learns from the price of a firm's stock when making a decision how much capital to provide for new investment. The efficiency of the investment decision and the volatility of prices and investments depend crucially on the strategic interaction among...

This paper shows that profitable market manipulation via trade is possible if prices perform an allocational role. If market prices affect the real value of an asset (e.g. because they contain information relevant to a firm's investment decisions), a potentially informed speculator may wish to...

Using a structural market microstructure model, we develop a new measure of price informativeness that utilizes data on both price and volume, which we call the INF measure. We show that, compared to traditional measures, our measure is better at capturing information in prices, evidenced by...

In the recent recession and current economic recovery, policymakers have supported asset prices in the U.S. treasury and mortgage markets, expecting that improvement in the balance sheet of banks will lead to more commercial lending. In general, we document that increases in housing prices in a...