This paper investigates the impact of asset liquidity on the valuation of corporate securities and the firm's financing decisions. I show that asset liquidity increases debt capacity only when bond covenants restrict the disposition of assets. By contrast, I demonstrate that, with unsecured debt, greater liquidity increases credit spreads on corporate debt and reduces optimal leverage. The model also determines the extent to which pledging assets increases firm value and relates the optimal size of the pledge to firm and industry characteristics. Finally, I show that asset liquidity and security provisions may help explain leverage ratios and credit spreads observed in practice.

We consider optimal capital allocation and managerial compensation mechanisms for decentralized firms when division managers have an incentive to misrepresent project quality and to minimize privately costly but value-enhancing effort. We show that in the optimal mechanism firms always underinvest in capital relative to a naive application of the net present value (NPV) rule. We make a number of novel cross-sectional predictions about the severity of the underinvestment problem and the composition of managerial compensation contracts. We also find that firms will optimally give greater performance-based pay (at the expense of fixed wages) to managers of higher quality projects to mitigate the incentive for managers to overstate project quality. Managers may thus receive greater performance-based pay because they manage higher quality projects, not that greater performance-based pay causes firm value to increase.

This paper develops and tests procedures for ranking the performance of security analysts based on the timeliness of their earnings forecasts, the abnormal trading volume associated with these forecasts, and forecast accuracy. Our framework provides an objective assessment of analyst quality that differs from the standard approach, which uses survey evidence to rate analysts. We find that lead analysts identified by our measure of forecast timeliness have a greater impact on stock prices than follower analysts. Further, we find that performance rankings based on forecast timeliness are more informative than rankings based on abnormal trading volume and forecast accuracy. We also present evidence that analyst's forecast revisions are correlated with recent stock price performance, suggesting that security analysts use publicly available information to revise their earnings forecasts.

We investigate the trade-off between the benefits from bank monitoring when a banker is represented on a firm's board and the costs from two sources: conflicts of interests between lenders and shareholders, and U.S. legal doctrines that generate lender liability for bankers on boards of firms in financial distress. Consistent with high costs of active involvement, bankers are on boards of large, stable firms with high proportions of collateralizable assets and low reliance on short-term financing. While permitting banks to own equity could mitigate conflicts, the protection of shareholder versus creditor rights could continue to reduce the role of U.S. banks in corporate governance.