This excellent book provides the reader with a broad introduction to, and a powerful advocacy of, behavioral finance. In the tradition of the best of the Clarendon Lecture Series, Andrei Shleifer provides a clear context and motivation for a collection of his influential ideas in this field, emphasizing central themes that link together the wide scope of this work. Topics include: investor sentiment, the limits of arbitrage, the closed-end fund puzzle, positive feedback investment, and both market overreaction and underreaction to news, as well as general discussions on the motivation for this research and promising future directions.

This paper develops a model in which managers voluntarily choose debt to credibly constrain their own future empire-building. Dynamically consistent capital structure is derived as the optimal response in each period of partially entrenched managers trading-off empire-building ambitions with the need to ensure sufficient efficiency to prevent control challenges. A policy of capital structure coordinated with dividends follows naturally, as do implications for the level, frequency, and maturity structure of debt as a function of outside investment opportunities. Additionally, the model yields new testable implications for security design, and changes in debt and empire-building over managerial careers.

This paper demonstrates that, in a simple setting with managerial concern for reputation and asymmetric information on ability, most managers may refrain from undertaking innovations that stochastically dominate an industry standard. Common components of uncertainty lead to market inferences of managerial ability based on relative performance. Managers who undertake the industry standard are consequently evaluated with a more accurate benchmark than those innovating. Discontinuities in compensation when performance is low lead managers to have differing valuations of an accurate benchmark, depending on type. In particular, very high and very low ability managers are more likely to undertake superior innovations than those of average ability.

This paper demonstrates that in a simple setting with managerial concern for reputation and asymmetric information on ability, most managers may refrain from undertaking innovations that stochastically dominate an industry standard. Common components of uncertainty lead to market inferences of managerial ability based on relative performance. Managers who undertake the industry standard are consequently evaluated with a more accurate benchmark than those innovating. Discontinuities in compensation when performance is low (because of firings) lead managers to have differing valuations of an accurate benchmark, depending on type. In particular, very high and very low ability managers are more likely to undertake superior innovations than those of average ability.

We analyze the design and renegotiation of covenants in debt contracts as a specific example of the contractual assignment of property rights under asymmetric information. Specifically, we consider a setting where managers are better informed than lenders regarding potential transfers from debt to equity associated with future investments. This simple adverse-selection problem leads to the allocation of greater ex ante decision rights to the creditor (the uninformed party), i.e., tighter covenants, than would follow under symmetric information. This corresponds well to empirical evidence indicating that covenants are very tight upon inception and are frequently waived (and never tightened) upon renegotiation.

[We analyze the design and renegotiation of covenants in debt contracts as a specific example of the contractual assignment of property rights under asymmetric information. Specifically, we consider a setting where managers are better informed than lenders regarding potential transfers from debt to equity associated with future investments. This simple adverseselection problem leads to the allocation of greater ex ante decision rights to the creditor (the uninformed party), i.e., tighter covenants, than would follow under symmetric information. This corresponds well to empirical evidence indicating that covenants are very tight upon inception and are frequently waived (and never tightened) upon renegotiation.]

We present a new methodology for studying the problem of intra-firm bargaining, based on the notion that contracts cannot commit the firm and its agents to wages and employment. We develop and analyse a general non-cooperative multilateral bargaining framework between the firm and its employees and consider outcomes which are immune to renegotiations by any party. Equilibrium firm profits are characterizable as both a weighted average of a neo-classical (non-bargaining) firm's profits and a generalization of Shapley value for a corresponding cooperative game. Furthermore, the resulting payoffs induce economically significant distortions in the firm's input and organizational-design decisions.

Organizational Design and Technology Choice under Intrafirm Bargaining: Reply by Lars A. Stole and Jeffrey Zwiebel. Published in volume 93, issue 1, pages 456-457 of American Economic Review, March 2003

We consider a wide number of applications of an intrafirm bargaining game within organizations where employees and the firm engage in wage negotiations. Under our presumption that contracts cannot bind employees to the organization, the resulting stable wage and profit profiles give rise to an objective function for the firm that places weight on inframarginal profits in an economically significant manner. We in turn employ this methodology to explore applications of organizational design, hiring and capital decisions, training and cross-training, the importance of labor and asset specificity, managerial hierarchies, preferences for unionization, responses to competition, and internal capital budgeting.