Entrepreneurs typically seek financing in decentralized markets, where they approach investors sequentially. We develop a model of sequential capital markets with privately informed investors. The sequential market creates a dynamic adverse selection externality that leads to overinvestment and excessive rents to intermediaries, even as the number of competing investors becomes arbitrary large. The resulting rents lead to excessive entry of investors and insufficient entry of entrepreneurs. Moving to a centralized market structure or reducing transparency restores competitiveness but may harm efficiency. The model also explains how even a small skill advantage for an investor can lead to preferential deal flow and outsized returns.

ABSTRACT We show that information aggregation in primary financial markets fails precisely when investors hold socially useful information for screening projects. Being wary of the Winner's Curse, less optimistic investors refrain from making financing offers, since their offers would be accepted only when a project is unviable. Their information is therefore lost. The Winner's Curse and associated information loss grow with the number of informed market participants, so that larger markets can lead to worse financing decisions and higher cost of capital for firms seeking financing. Precommitment to ration fundraising allocations, collusive club bidding, and shorting markets can mitigate the inefficiency.

ABSTRACT Many finance jobs entail the risk of large losses, and hard‐to‐monitor effort. We analyze the equilibrium consequences of these features in a model with optimal dynamic contracting. We show that finance jobs feature high compensation, up‐or‐out promotion, and long work hours, and are more attractive than other jobs. Moral hazard problems are exacerbated in booms, even though pay increases. Employees whose talent would be more valuable elsewhere can be lured into finance jobs, while the most talented employees might be unable to land these jobs because they are “too hard to manage.”

ABSTRACT Private equity funds pay particular attention to capital structure when executing leveraged buyouts, creating an interesting setting for examining capital structure theories. Using a large, international sample of buyouts from 1980 to 2008, we find that buyout leverage is unrelated to the cross‐sectional factors, suggested by traditional capital structure theories, that drive public firm leverage. Instead, variation in economy‐wide credit conditions is the main determinant of leverage in buyouts. Higher deal leverage is associated with higher transaction prices and lower buyout fund returns, suggesting that acquirers overpay when access to credit is easier.