We analyze the impact of credit default swaps (CDSs) trading on firm investment, long-term debt financing, and valuation. In our model, is endowed with a real option to initiate project enhance its future growth. Its creditors have access CDS contracts that hedge them against losses. show protection increases firm’s pledgable income: is, maximum amount it can raise. However, at same time decreases asset growth impedes initiation. As result, could reduce value, negative effects are stronger...

This paper develops a dynamic contracting (multitasking) model of levered firm. In particular, the manager selects long-term and short-term efforts, shareholders choose optimal debt default policies. Excessive short-termism ex post is for because has an asymmetric effect: receive all gains from effort but share effort. We find that grim growth prospects shareholder impatience imply higher levels short-termism. Also, incentive cost effect real option create nontrivial patterns endogenous...

I study a continuous-time principal–agent model in which multitasking agent engages unobserved risk-taking. Risk-taking creates short-term profits but also increases the chance of large losses. The optimal contract incentivizes excessive risk-taking when has insufficient skin game. Moreover, if low effort is not too value-destroying and private benefit shirking enough, principal can eliminate by implementing effort. However, with variable project scale, addressing incentives downsizing...

This paper develops a dynamic contracting (multi-tasking) model of levered firm. In particular, the manager selects long-term and short-term efforts shareholders choose optimal debt default policies. Excessive short-termism ex-post is for shareholders, because has an asymmetric effect: receive all gains from effort but share effort. We find that grim growth prospects shareholder impatience imply higher levels short-termism. Also, incentive cost effect real option create non-trivial patterns...

Abstract I study leverage dynamics when the manager has discretion over firm's debt policy but cannot commit to it ex-ante. Private benefits of control reduce manager's incentives ratchet up and may induce active repurchase time. Therefore, agency frictions prevent excessive leveraging increase funding advantage debt. Firms with weak governance low managerial ownership favor long-term debt, have high capacity, maintain target leverage, adjust level faster towards target. Finally, firms costs...

We analyze the impact of credit default swaps (CDS) trading on firm investment, long-term debt financing, and valuation. In our model, is endowed with a real option to initiate project enhance its future growth. Its creditors have access CDS contracts that hedge them against losses. show protection increases firm's pledgeable income, is, maximum amount it can raise. However, at same time decreases asset growth impedes initiation. As result, could reduce value, negative effects are stronger...

I study a continuous-time principal-agent model in which multitasking agent engages unobserved risk-taking. Risk-taking creates short-term profits but also increases the chance of large losses. The optimal contract incentivizes excessive risk-taking when has insufficient skin game. Moreover, if low effort is not too value-destroying and private benefit shirking enough, principal can eliminate by implementing effort. However, with variable project scale, addressing incentives downsizing...

We develop an equilibrium financing model that addresses agency frictions in sustainable investment, featuring socially responsible investors as intermediaries. Actively engaging with firms, these provide a funding advantage to green enterprises. Our findings reveal sustainability-linked debt emerges optimal security design, incentivizing both entrepreneurs and social investors. The return on capital, determined by incentive costs financial constraints associated investments, rises investor...

This paper analyzes securities auctions for which bidders have an option to acquire information after winning the right develop a project. The payment in consists of up-front cash bid and contingent security bid. distorts investment acquisition relative first-best. Steep necessarily provide agent with lower incentives that prevent either Type I or II errors, compared flat securities. To extract rents, optimal auction involves payment; when agents are protected by limited liability, takes...

We develop a liquidity management model with dynamic agency. The agent controls short-term investment, which affects the current profitability, and long-term determines firm growth. Regardless of correlation between transitory cash flow permanent growth shocks, optimal contract implements excessive leading to corporate short-termism. Our predicts that distressed firms behave more short-termist higher shocks implement riskier longer-term policies. Moreover, cash-flow sensitivity is...

We characterize the optimal dynamic mechanism for capital budgeting and managerial compensation. The division manager privately observes project productivity at each point in time as well an initial signal that governs evolution. show allocation can be implemented by a simple with one-time report of signal. In mechanism, headquarters delegates investment decisions to finances expenditure tying budget linear compensation scheme. growth power incentives depend on how affects future types.