This paper has explored a problem presented by introducing formal measures of risk into firm decision making. Risk measured in the firm's asset collection may not equal risk in the claims against the assets, with a resulting inequality of valuations in an a priori balance sheet. This nonadditivity problem does not occur if covariance with some external portfolio is used as the risk measure. Computer testing has suggested that the nonadditivity problem could occur in considerable magnitude if variance were used as a risk measure, and to a substantially lesser extent if standard deviation (or the coefficient of variation) were used. Nonadditivity problems in the measures were worse in rather high (but not ultra-high) debt-use ranges and did not exist at all as long as debt was used so moderately that no chance of default was foreseen. While no findings were stated on this point, intuition and some unreported work done by one of the authors both suggest that nonadditivity would also be a problem in mixed risk measures, in which both covariance with an external portfolio and a measure of dispersion in the firm's own portfolio are employed.

A substantial amount of scholarly effort in recent years has been devoted to the determination of the relationship between banking structure and performance. In general, the results of these studies indicate that banking structure affects both the price and quantity of banking services, but, for practical policy purposes, the impact of banking structure is quite small. Yet, the results of these studies have been inconclusive and contradictory to a substantial degree.

A great deal of interest has been expressed by economists and policy-makers concerning the adequacy of the financing of small and, especially, new firms. This paper presents an empirical study of the adequacy of one particular source of funds—outside equity.

Some U.S. firms have women directors and executives, while many do not. We seek to explain this heterogeneity. Using U.S. Census data from 1900, we find that U.S. counties with populations originating from countries with stronger gender-egalitarian beliefs have more women in the labor market and in STEM occupations, and lower gender-pay gaps. Firms headquartered in such counties have more women executives and directors. When firms move to more gender-egalitarian counties, the representation of women on board increases. Our findings are consistent with the idea that inherited beliefs about gender roles impact the labor market and corporate leadership.

Using cash flows from a large sample of buyout and venture funds, I show that private equity (PE) distributions predict returns in the industries of funds’ specialization. My tests distinguish timing skill from reactions to market conditions and spillover effects of PE activity. Fund managers foresee comparable public firms’ earnings but sell at the industry peaks only if they have performance fees to harvest. These results have implications for manager selection and improve our understanding of PE fund returns and the role of PE in capital markets.

We investigate the relation between a firm’s product warranty level and its leverage. We find that leverage relates negatively to the warranty level and that this relation is robust to controls for endogeneity and self-selection into offering warranties. The negative warranty-leverage relation obtains only in the subsample of firms in the manufacturing industries. We also show that firms with warranties have the lowest debt levels, firms without warranties but operating in industries where other firms offer warranties on average carry higher debt, and firms in industries where no firm offers a warranty have the highest debt levels.

I analyze optimal loan modification schemes in a stochastic home price and stochastic interest-rate environment. Lenders maximize loan values by managing the borrower’s option to default on the loan and prepayment option. Given negative equity, controlling for the borrower’s ability to pay, rate reductions and maturity extensions result in a higher probability of redefault by homeowners even after modification of their loans. In contrast, loan write-downs (the Principal Principle), not a favored recipe, are value maximizing for the lender. A shared-appreciation mortgage enhances the ability to pay, mitigates adverse selection, and reduces the present value of expected deadweight foreclosure costs.

This paper investigates whether some individuals are prone to behavioral biases in their 401(k) investments. Using demographic data and allocation information for over 73,000 employees, I examine two allocation biases and a participation bias. The findings suggest that higher salaried employees tend to make significantly better choices. Participants who earn $100, 000 hold 12. 7% less in company stock, are 3% less likely to follow the framing 1/ n heuristic, and are 37.7% more likely to participate than those earning $46, 000. Women make better choices in two of the three cases and I find evidence of mental accounting.