[We investigate the trade-off between incentive provision and inefficient rollover freezes for a firm financed with short-term debt. First, debt maturity that is too short-term is inefficient, even with incentive provision. The optimal maturity is an interior solution that avoids excessive rollover risk while providing sufficient incentives for the manager to avoid riskshifting when the firm is in good health. Second, allowing the manager to risk-shift during a freeze actually increases creditor confidence. Debt policy should not prevent the manager from holding what may appear to be otherwise low-mean strategies that have option value during a freeze. Third, a limited but not perfectly reliable form of emergency financing during a freeze—a "bailout"—may improve the terms of the trade-off and increase total ex ante value by instilling confidence in the creditor markets. Our conclusions highlight the endogenous interaction between risk from the asset and liability sides of the balance sheet.]

Ex ante estimates of the volatility premium embedded in VIX futures, known as the VIX premium, fall or stay flat when ex ante measures of risk rise. This is not an artifact of mismeasurement: (i) ex ante premiums reliably predict ex post returns to VIX futures with a coefficient near one, and (ii) falling ex ante premiums predict increasing ex post market and investment risk, creating profitable trading opportunities. Falling hedging demand helps explain this behavior, as premiums and trader exposures tend to fall together when risk rises. These facts provide a puzzle for theories of why investors hedge volatility. Received January 13, 2017; editorial decision April 26, 2018 by Editor Stijn Van Nieuwerburgh.

Do deals with debt collectors alleviate consumer financial distress? Using new data linking court and credit registry records, we examine civil collection lawsuits where consumers can settle out of court. Random assignment of judges with different styles generates exogenous variation in the likelihood of settlement negotiations. We find that settlements increase financial distress relative to going to court, likely by draining consumers of liquidity. The effect is stronger among less financially literate consumers. Survey evidence suggests that consumers generally overestimate how much they would pay through the court system. Perceived nonpecuniary benefits also motivate some consumers to settle.

We investigate the trade-off between incentive provision and inefficient rollover freezes for a firm financed with short-term debt. First, debt maturity that is too short-term is inefficient, even with incentive provision. The optimal maturity is an interior solution that avoids excessive rollover risk while providing sufficient incentives for the manager to avoid risk-shifting when the firm is in good health. Second, allowing the manager to risk-shift during a freeze actually increases creditor confidence. Debt policy should not prevent the manager from holding what may appear to be otherwise low-mean strategies that have option value during a freeze. Third, a limited but not perfectly reliable form of emergency financing during a freeze—a “bailout”—may improve the terms of the trade-off and increase total ex ante value by instilling confidence in the creditor markets. Our conclusions highlight the endogenous interaction between risk from the asset and liability sides of the balance sheet.