Shareholders of a Regional Bell Operating Company (RBOC) tend to live in the area which it serves, and an RBOC's customers tend to hold its shares rather than other RBOCs' equity. The geographic bias of the RBOC investors is closely related to the general tendency of households' portfolios to be concentrated, of employees' tendency to own their employers' stocks in their retirement accounts, and to the home country bias in the international arena. Together, these phenomena provide compeling evidence that people invest in the familiar while often ignoring the principles of portfolio theory.

We explain the observed negative relation between market value of firms and their fund raising activities. Ours is not a signalling model. The firm's objective is to maximize the present value of its income. Considerations of cash availability (liquidity) and unfolding of uncertainty drive our model. Income from operations is an important source of liquidity. Low earnings are associated with low liquidity. Whether earnings are low or not is known to some extent in advance of the realization itself. External financing is pursued in anticipation of the earnings' realization in order to maintain a desired level of liquidity. Therefore, anticipated low earnings are associated with a high level of external financing. Of course, an anticipation of low earnings is also accompanied by a decrease in the firm's value. The empiricist who looks at time series of a firm's value and of its dividend/external financing announcements would then record positive correlation between value and cash distributions and negative correlation between value and external financing.

We present a model of the maturity of a bank’s uninsured debt. The bank borrows to invest in a long-term asset with endogenous and nonverifiable risk. This moral hazard problem leads to excessive risk-taking. Short-term debt may have a disciplining effect on risk-taking, but it may lead to overborrowing and/or inefficient liquidation. We characterize the conditions under which short- and long-term debt are feasible, and show circumstances where only short-term debt is feasible and where short-term debt dominates long-term debt when both are feasible. The results are consistent with some features of the period preceding the 2007-2009 global financial crisis.

Combining survey responses and trading records of clients of a German retail broker, this paper examines some of the causes for the apparent failure to buy and hold a well-diversified portfolio. The subjective investor attributes gleaned from the survey help explain the variation in actual portfolio and trading choices. Self-reported risk aversion is the single most important determinant of both portfolio diversification and turnover; other things equal, investors who report being more risk tolerant hold less diversified portfolios and trade more aggressively. Less experienced investors similarly tend to churn poorly diversified portfolios. The effect of perceived knowledge on portfolio choice is less clear cut; holding other attributes constant, investors who think themselves knowledgeable about financial securities indeed hold better diversified portfolios, but those who think themselves more knowledgeable than the average investor churn their portfolios more.

Participants in 401(k) retirement plans violate the basic principle of diversification by investing significant fractions of their savings in their employers' equity. This paper characterizes investors' active changes to their company stock investment over time by analyzing new inflows and transfers. The average investor seems to base active changes on salient information, paying attention to past returns, volatility, and business performance. Past returns, over a three-year horizon, predict higher inflow allocations and transfers, whereas volatility and business performance only have a weak effect. The sensitivity to past returns is asymmetric, with investors reacting more strongly to positive and above-S&P500 returns.

A bilateral moral-hazard problem provides a rationale for "up-or-out" employment contracts. The employer sets a wage higher than opportunity cost to induce the worker to invest in firm-specific capital. If the individual does not make the grade, it is in the firm's interest ex post to fire him. Had the initial arrangement not included provisions for firing individuals, the firm would underreport the value of the employee, wrecking the incentive scheme. The basic model permits both firm and worker to be risk neutral. Therefore, it admits a straightforward multiperiod extension, which we also investigate.

This paper presents a strategic theory of contract renegotiation. In this theory, suboptimal contracts are put in place initially to protect one party against undesirable actions by another party and are renegotiated once the danger is past. We develop a model to establish the cases in which simple contracts cannot achieve desirable outcomes, so that only a complicated contract or renegotiation will serve. Unlike most previous accounts of contract renegotiation, this theory does not rely on exogenous uncertainty to motive renegotiation.

Often the timing of certain activities has a strong periodic element.Due to circumstanc es, an activity is sometimes made outside the regular cycle, but it d oes not break the cycle. Thus, the timing of future activities is hig hly predict-able. The author provides a stochastic model where the da ta are not seasonal, yet the optimal behavior has a strong periodic e lement.

Shareholders of a Regional Bell Operating Company (RBOC) tend to live in the area which it serves, and an RBOC's customers tend to hold its shares rather than other RBOCs' equity. The geographic bias of the RBOC investors is closely related to the general tendency of households' portfolios to be concentrated, of employees' tendency to own their employers' stocks in their retirement accounts, and to the home country bias in the international arena. Together, these phenomena provide compeling evidence that people invest in the familiar while often ignoring the principles of portfolio theory.