Basel II attempts to eliminate incentives for regulatory capital arbitrage and align capital regulation with best practices in credit risk management. Despite the imposition of very heavy compliance costs, it is unlikely to succeed in achieving either goal. This paper describes an alternative approach, based on mandatory issues of subordinated debt, which makes use of market discipline to achieve these goals at much lower cost.

This paper examines how market volatility affects corporate financing transactions. Firms face substantial uncertainty with respect to the price, demand, and after-market costs associated with raising public capital. The ability to effectively hedge this risk is critical to the efficient financing of firm capital needs. Using monthly US equity-related financing transactions from 1970 to 1998, I find that market volatility dampens financing transactions, particularly among small or unseasoned firms. Periods of above normal market volatility are associated with a significant 13% decline in the frequency of initial public offering (IPO) transactions and a 21% decline in the number of IPO dollars raised. Increased market volatility generates greater underwriting fees but does not affect IPO underpricing. The findings are most consistent with Mandelker and Raviv's [J. Finance 32 (1977) 683] model of costly distribution risk bearing.

This article provides an overview of the rapidly growing entrepreneurial finance literature. The studies reviewed in the article focus on four primary areas of inquiry: (i) alternative sources of capital, (ii) financial contracting issues, (iii) public policy, and (iv) the dynamics of private equity returns. Although much has been learned in each area, this survey highlights several areas in which our understanding of the issues remains incomplete.

During the internet bubble, dot-com stocks rose by a factor of 35, creating what we now know were massively distorted price signals. This paper looks at net value creation in a sample of 441 venture-backed dot-coms that received over US$21 billion from private and public equity investors. As of the end of 2001, this US$21 billion corresponded to an estimated US$39 billion of enterprise value, giving an annualized return-on-equity capital invested of 19%. These results suggest that, despite the distorted price signals and contrary to popular perception, wealth was created during the dot-com investment boom.

This paper seeks to explain how policy actions undertaken at the outset of recent crises—particularly the issuance of extensive liquidity support and government guarantees—absorb off-budget fiscal resources and inappropriately constrain officials’ subsequent options for restructuring their country’s troubled financial and corporate sectors. Empirical evidence supports the commonsense view that the damage a crisis works on a country’s financial sector and on its real economy is lessened by taking market-mimicking actions that promptly estimate and allocate losses during the early stages of a crisis. The most important steps are to plan to call a timeout to separate hopelessly insolvent institutions from potentially viable ones and to provide haircuts, guarantees, and liquidity support in ways that protect taxpayers and avoid subsidizing insolvent institutions’ longshot gambles for resurrection.

There are relatively few direct tests of the economic effects of asymmetric information because of the difficulty in identifying exogenous information measures. We propose a novel exogenous measure of information based on the quality of property tax assessments in different regions and apply this to the U.S. commercial real estate market. We find strong evidence that information considerations are significant. Market participants resolve information asymmetries by purchasing nearby properties, trading properties with long income histories, and avoiding transactions with informed professional brokers. The evidence that the choice of financing is used to address information concerns is mixed and weak.