We are delighted to announce that the winner of the 2010 Deutsche Bank Best Paper Award is: “Corporate Governance Externalities” by Viral Acharya and Paolo Volpin which appeared in issue 1 of Volume 14 and was voted by the editorial board as the best article published in the last four issues of the Review of Finance. The two runners-up for the award were: “Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt” by Jens Hilscher and Yves Nosbusch and “The Limits of the Limits of Arbitrage” by Alon Brav, J.B. Heaton and Si Li The awards were presented at the 2010 annual meeting of the European Finance Association in Frankfurt on August 27th. We are grateful to the Deutsche Bank Foundation for sponsoring this award.

ABSTRACT We derive the optimal labor contract for a levered firm in an economy with perfectly competitive capital and labor markets. Employees become entrenched under this contract and so face large human costs of bankruptcy. The firm's optimal capital structure therefore depends on the trade‐off between these human costs and the tax benefits of debt. Optimal debt levels consistent with those observed in practice emerge without relying on frictions such as moral hazard or asymmetric information. Consistent with empirical evidence, persistent idiosyncratic differences in leverage across firms also result. In addition, wages should have explanatory power for firm leverage.