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

This paper analyzes the optimal financial structure for a firm in which the top manager must provide incentives to a subordinate in addition to exerting directly productive efforts. Optimal capital structure is shown to involve a moderate level of debt with a substantial penalty for default, and passive shareholders. In a two- or three-layer hierarchy, optimal leverage is shown to decrease as either the number of hierarchical levels or the importance of agents further down the hierarchy increases. This and other implications of the model square well with existing evidence and suggest new directions for empirical work

A model with private information that supports conventional arguments for a government monopoly in supplying circulating media of exchange is constructed. The model also yields rate-of-return and velocity predictions which are consistent with observations from free banking regimes and fiat money regimes. In a laissezfaire banking equilibrium, fiat money is (essentially) not valued, and the resulting allocation is not Pareto optimal. However, if private agents are restricted from issuing circulating notes, there exists an equilibrium with valued fiat money that Pareto dominates the laissez-faire equilibrium and is Pareto optimal within a restricted class of allocations. Journal of Economic Literature Classification Numbers: 020, 310.

The commitment value of financial contracts is limited by the ability of contracting parties to renegotiate them away, if it becomes mutually beneficial to do so. When debt contracts are used by oligopolistic firms to commit to aggressive output strategies as in Brander-Lewis, we show that renegotiation may undermine commitment under symmetric information, but not generally under asymmetric information. Lasting contracts that survive renegotiation are proposed. It is shown that there exist lasting debt contracts which preserve the commitment value and in which not all debt is renegotiated away.

In our model risk-neutral shareholders need to motivate a manager to select among projects with different risks, and to work hard in implementing the chosen project. Curvature of the manager's compensation contract as a function of profit affects his attitude toward project risk. The optimal curvature depends on the trade-off between controlling project risk and motivating effort. The analysis predicts greater option-based compensation when there are desirable risky growth opportunities (proxied by Tobin's q or R&D expenditures) and less option compensation when there are effective monitoring institutions (such as outside directors and bank lenders

This paper demonstrates that market makers have the ability and incentive to facilitate price discovery in securities markets. Market makers can expedite the process of intertemporal price formation by setting prices to induce statistically more informative order flow. Such actions constitute an investment in the production of information. Under certain conditions, market makers can recoup the cost of this investment by making better pricing decisions in the future with more precise information. These conditions are analyzed in a general model and several examples that illustrate the complex nature of price discovery are presented