[We solve for a firm's optimal cash holding policy within a continuous time, contingent claims framework using dividends, short-term borrowing, and equity issues as controls assuming mean reversion of earnings. Optimal cash is non-monotone in business conditions and increasing in the level of long-term debt. The model matches closely a wide range of empirical benchmarks and predicts cash and leverage dynamics in line with the empirical literature. Firm value is quite insensitive to changes in the level of long-term debt. The model has interesting implications for asset substitution, hedging, and pecking order. Growth opportunities do not greatly affect cash holding policy.]

[This article studies the design and valuation of debt contracts in a general dynamic setting under uncertainty. We incorporate some insights of the recent corporate finance literature into a valuation framework. The basic framework is an extensive form game determined by the terms of a debt contract and applicable bankruptcy laws. Debtholders and equityholders behave noncooperatively. The firm's reorganization boundary is determined endogenously. Strategic debt service results in significantly higher default premia at even small liquidation costs. Deviations from absolute priority and forced liquidations occur along the equilibrium path. The design tends to stress higher coupons and sinking funds when firms have a higher cash payout ratio.]

THIS PAPER CONSIDERS how certain theoretical results on consistent commodity aggregation can be applied to the problem of the estimation of a complete system of demand equations. The method proposed here builds upon the classic results of Gorman [16], particularly the case he calls perfect price aggregation. These results are well known in the literature on two-stage budgeting but have not been widely applied to problems of empirical demand analysis. This relative neglect of perfect price aggregation is regrettable because several of their features recommend their use in econometric applications. In the perfect price aggregate approach to demand analysis, demand equations are characterized as a two-level system consisting of a system of group expenditure functions and a number of systems of conditional demand functions. This two-level system provides a manageable way of introducing greater detail into a complete system of demand equations. Information about particular commodities may be introduced in the specification of conditional demand functions. As will be discussed below, the two-level system can be estimated by an iterative estimation method in which the maximum number of demand equations which can be estimated is greatly increased over the number found in past estimates of complete systems of demand equations. Even when one is principally interested in estimating group expenditures the perfect price aggregate approach is attractive because the intragroup substitutions due to detailed price changes can affect total group expenditures and this effect is taken into consideration through the computation of the perfect price indices. Thus it may be possible that a perfect price aggregate model will yield better estimates of group expenditures than would an approach which did not explicitly treat aggregation problems. Another pleasing feature of the perfect price aggregate approach to demand analysis is that it avoids the misspecification which results when the commodity

The paper provides a theoretical description of hedging in futures markets that account for the behavior of a broad class of agents. Specific optimal decision rules are derived for agents concerned with the mean and variance of profit. These rules are used to evaluate how optimal cash and futures positions are related to price expectations, the production possibilities, and the number of futures markets available.

We develop an incomplete contracts model to study the extent to which control rights of different financings affect corporate growth. The model admits a standard hold-up problem under equity financing; insiders may be disincentivized to do R&D because outside investors can use their control rights to expropriate large parts of the returns by hiring more efficient managers in the future. Debt financing may give rise to a double moral hazard problem; both managers and shareholders may divert corporate resources to themselves before debt is serviced. However, in many cases, these phenomena do not occur in equilibrium and control rights are irrelevant. Cross-sectional predictions are derived from those cases where control rights matter. Consistent with the empirical evidence, leverage is inversely related to growth and to profitability.

We consider the determinants of pay in US banks since 1986 using a new structural model in which banking firms are matched in rank order with management teams of varying talent. We calibrate the model to data from US bank holding companies focussing on labor’s share of bank value-added, the level of bankers’ pay and its sensitivity to bank performance. We find that three changes in banking regulation have shaped bankers’ pay in the last three decades: (1) removal of obstacles to interstate banking set off a process of banking consolidation in the 1990s, (2) deregulation at the end of the 1990’s allowing banks to pursue non-interest income has driven a trend toward higher pay and higher incentive pay, (3) tougher regulations following the financial crisis imposing an implicit tax on size and complexity has moderated pay in large banks but in so-doing has allowed smaller banks to take on business outside of standard credit intermediation resulting higher pay in those banks. Taking these structural changes into account we find a tendency over three decades for a decline in labor’s share, in line with superstar effects implied by our structural model.

We critically reassess the notion that high liquid asset holding by firms faced with weak investor protection is evidence of managerial rent extraction. We show that firms facing agency problems may establish tight controls over management through concentrated ownership. Using data on Belgian listed firms between 1991 and 2006, we find a strong positive association between ownership concentration and cash holding. This indicates a precautionary motive on the part of the controlling shareholders who highly value control. We also find that firm market valuation is positively affected by the amount of cash held by firms. On the other hand, managerial ownership has no impact. These results are consistent with the hypothesis that firms' owners are pursuing a rational strategy to mitigate agency costs in the face of weak investor protections.

We solve for a firm's optimal cash holding policy within a continuous time, contingent claims framework using dividends, short-term borrowing, and equity issues as controls assuming mean reversion of earnings. Optimal cash is non-monotone in business conditions and increasing in the level of long-term debt. The model matches closely a wide range of empirical benchmarks and predicts cash and leverage dynamics in line with the empirical literature. Firm value is quite insensitive to changes in the level of long-term debt. The model has interesting implications for asset substitution, hedging, and pecking order. Growth opportunities do not greatly affect cash holding policy.

This article studies the design and valuation of debt contracts in a general dynamic setting under uncertainty. We incorporate some insights of the recent corporate finance literature into a valuation framework. The basic framework is an extensive form game determined by the terms of a debt contract and applicable bankruptcy laws. Debtholders and equityholders behave noncooperatively. The firm’s reorganization boundary is determined endogenously. Strategic debt service results in significantly higher default premia at even small liquidation costs. Deviations from absolute priority and forced liquidations occur along the equilibrium path. The design tends to stress higher coupons and sinking funds when firms have a higher cash payout ratio.

The paper proposes a multi-period model of hedging which allows for a futures position to be revised within the cash market holding period. Within this framework, we assess the robustness of the two-period theory of hedging when generalized to many periods. We characterize the normal time path of a hedge and the way it is affected by the requirement that futures accounts “mark to market” daily. Finally we show how the resolution of production uncertainty over time affects hedging behavior and determines the volatility of futures prices.