This paper studies the financing role of leasing and secured lending. We argue that the benefit of leasing is that repossession of a leased asset is easier than foreclosure on the collateral of a secured loan, which implies that leasing has higher debt capacity than secured lending. However, leasing involves agency costs due to the separation of ownership and control. More financially constrained firms value the additional debt capacity more and hence lease more of their capital than less constrained firms. We provide empirical evidence consistent with this prediction. Our theory is consistent with the explanation of leasing by practitioners, namely that leasing “preserves capital,” which the academic literature considers a fallacy.

This paper argues that when managers have private information about how productive assets are under their control and receive private benefits, substantial bonuses are required to induce less productive managers to declare that capital should be reallocated. Moreover, the need to provide incentives for managers to relinquish control links aggregate capital reallocation to executive compensation and turnover over the business cycle. Capital reallocation and managerial turnover are procyclical if expected managerial compensation increases with the number of managers hired. The agency problem between owners and managers makes bad times worse because capital is less productively deployed when agency costs render reallocation too costly. Empirically we find that both CEO turnover and executive compensation are remarkably procyclical.

Used capital is cheap up front but requires higher maintenance payments later on. We argue that the timing of these investment cash outflows makes used capital attractive to financially constrained firms, since it is cheap when evaluated using their discount factor. In contrast, it may be expensive from the vantage point of an unconstrained agent. We provide an overlapping generations model and determine the price of used capital in equilibrium. Agents with less internal funds are more credit constrained, invest in used capital, and start smaller firms. Empirically, we find that the fraction of investment in used capital is substantially higher for small firms and varies significantly with measures of financial constraints.

A quantitative examination of the demand for liquid assets arising from consumption smoothing motives reveals that such demand is very low. Consumers faced with income streams calibrated to match income and unemployment data and returns and transactions costs calibrated to match US Treasury Bill data almost exclusively buy and hold illiquid long term assets even though the return premium on long term assets is quite small. This is because, with standard preferences, savings are highly persistent even when risky income is not. In the calibrated model, the first order autocorrelation of savings is an order of magnitude larger than that of income.

This paper shows that the amount of capital reallocation between firms is procyclical. In contrast, the benefits to capital reallocation appear countercyclical. We measure the amount of reallocation using data on flows of capital across firms and the benefits to capital reallocation using several measures of the cross sectional dispersion of the productivity of capital. We then study a calibrated model economy where capital reallocation is costly and impute the cost of reallocation. We find that the cost of reallocation needs to be substantially countercyclical to be consistent with the observed joint cyclical properties of reallocation and productivity dispersion.

This paper analyzes a model in which long-term risky assets are illiquid due to adverse selection. The degree of adverse selection and hence the liquidity of these assets is determined endogenously by the amount of trade for reasons other than private information. I find that higher productivity leads to increased liquidity. Moreover, liquidity magnifies the effects of changes in productivity on investment and volume. High productivity implies that investors initiate larger scale risky projects which increases the riskiness of their incomes. Riskier incomes induce more sales of claims to high quality projects, causing liquidity to increase.

This paper considers the empirical stylized facts about CEO turnover in the context of a competitive assignment model in which CEOs and firms form matches based on multiple characteristics. CEOs are viewed as hedonic goods with multidimensional skill bundles. Likewise, firms’ production functions have heterogeneous weights on CEO skills such as firm-specific knowledge, ability to grow sales, and ability to cut costs. There exists a competitive market for CEOs, whose wages are determined analogously to the prices of the hedonic goods in Rosen (1974). In the competitive assignment framework with multiple skill dimensions, both poor relative performance and poor absolute performance are associated with higher rates of CEO turnover even though there is no agency problem or learning. We construct a large dataset describing turnover events during the period 1992-2006, including the type of turnover event, and the characteristics and pay of the replacement manager. We document the salient stylized facts about CEO turnover and replacement apparent in the data, and show that the competitive assignment model is consistent with several of these features.

In many developing countries, the institutional framework governing economic life has its roots in the colonial period, when the interests of European settlers clashed with those of the native population or imported slaves. We examine the economic implications of this conflict in a framework where institutions are represented by the number of people with property-rights protection, i.e., “gun owners.” In the model, gun owners can protect their own property, they can exploit others who do not own guns, and they may decide to extend property rights by handing out guns to previously unarmed people. The theory generates a “reversal of fortune” between colonies with many and few oppressed: income per capita is initially highest in colonies with many oppressed that can be exploited by gun owners, but later on excessive concentration of economic power becomes a hindrance for development.

This paper studies the level and dynamics of the value of aggregate liquidity induced by firms’ financing shortfalls. We model liquidity and cash flows as internal funds available for investment in an economy where external funds are costly. We study whether the use of liquidity to hedge investment opportunities can generate substantial liquidity premia with empirically observed countercyclical properties, and show how firms’ financial positions affect the value of aggregate liquidity. Cash flows affect the “natural supply” of liquidity and are procyclical. Thus, we argue that shortfalls between firms’ financing needs and available liquid funds are more likely to occur in bad times when current cash flows are low, rendering liquidity premia countercyclical. We investigate the relationship between such shortfalls and the value of aggregate liquidity empirically using US Flow of Funds and Compustat data.