We analyze the value to firms of being able to renegotiate covenants in their debt contracts. Covenants control agency problems, but also reduce firms' flexibility to pursue profitable investments. Initial covenants will be more severe for renegotiable contracts, because they can be relaxed selectively when the lender believes they pose an inefficient constraint. We show firms with high ex ante credit risk find the option to renegotiate most valuable. The model is used to explain why bank loans and privately placed debt typically have harsher covenants than public debt and to predict which firms will borrow using closely held debt. Journal of Economic Literature Classification Numbers: D82, G21, G32.

This paper evaluates the economies of scale and scope in the French mutual funds (SICAV) industry. This segment of the financial sector offers the unique characteristic that some firms specialize, while others supply several products. The results suggest economies of scale and scope for small institutions and diseconomies for larger firms. An appropriate size for a diversified company is in the range of FF 2.9 billion

In this paper we analyze how depositors can employ both monitoring and capital requirements to control the risk of bank assets. We also analyze how monitors should be compensated if their actions are not directly observable and if there are binding limits on their liability. Second-best capital and monitoring levels (with unobservable actions) will be distorted away from their respective first-best levels. We derive some results about the nature of these distortions and characterize the optimal incentive scheme for monitors

This paper examines why we have marketmakers (specialists in stock markets, used-car dealers) in some markets and matchmakers (real-estate brokers, employment agencies) in others. Using a bilateral search model, it is shown that when the valuations of the agents are private information, marketmaking might yield higher or lower profits and welfare effects than matchmaking, depending on the efficiency and the cost of search and on the distribution of valuations of the agents. This is in contrast to an earlier result that when the agents' valuations are common knowledge marketmaking yields higher profits and greater welfare effects than matchmaking

This paper analyzes the effect of borrower self-selection between fixed- and adjustable-rate mortgages (FRMs and ARMS) on the pricing of FRMs. Self-selection occurs according to borrower mobility, with the most mobile borrowers favoring ARMS and less mobile borrowers choosing FRMs. The FRM interest rate depends on the average mobility of the FRM borrower pool, which determines the average duration of FRM loans. Comparative-static analysis of the equilibrium shows that any exogenous change that increases the relative attractiveness of FRMs enlarges the FRM borrower pool, which lowers its average mobility, shortens the duration of FRM loans, and thus reduces their price. Thus, an increase in the demand for FRMs actually reduces the FRM interest rate

This paper shows that a debt contract with warrants for the lender and cash/equity settlement options for the entrepreneur-borrower is the optimal contract in a setting with moral hazard and unverifiable states of nature. This contract makes it possible to contract optimally ex ante on unverifiable states; debt obligations are adjusted to state realizations so that debt is made safer. Moral hazard is reduced as a result

We examine the design of compensation contracts and determination of investment policies when a manager has private information regarding the effect of investment on both the firm's cash flows and the private benefits she is able to extract from employment. We show that, in general, the optimal mechanism is characterized by a menu of salary and option contracts. When the manager's private information relates only to the firm's cash flows, the firm overinvests relative to the Pareto optimal level. On the other hand, if the private information relates only to private benefits, the firm will underinvest.

This paper studies distinctions between fixed-price and Dutch auction self-tenders for common stock. We find that fixed-price tenders pay higher premiums to retire greater equity fractions than Dutch offers yet generate similar total returns to stockholders. Accordingly, total returns are significantly higher in Dutch auctions after controlling for tender and firm characteristics. In addition, wealth transfers to owners of repurchased shares are significantly higher in fixed-price offers. The Dutch mechanism thus appears to induce increases in firm value with smaller disbursals of cash. These cost savings to investors who maintain their ownership may explain the popularity of the new technique

This paper develops a model of security broker behavior under price uncertainty. The model examines the process of matching orders and the determinants of equilibrium brokerage commission rates. Institutional arrangements, search efficiency, execution costs, volume, risk, and the unit price of the security are shown to affect equilibrium brokerage commission rates. Some stylized facts of security brokerage are explained