Conference Agenda

I show that an asset pricing model for the equity claims of a value-maximizing firm can be constructed from its optimal financial contracting behavior. Deals between firms and financiers reveal the importance of contractible states for firm's equity value, namely the stochastic discount factor the firm responds to. I empirically evaluate the model in the cross section of expected equity returns. I find that the financial contracting approach goes a long way in rationalizing observed cross-sectional differences in average returns, also in comparison to mainstream asset pricing models.

I analyze welfare in a model of financial markets where information acquisition is endogenous, information has real effects, and all agents are rational. Agents who derive a private benefit from holding the asset (hedgers) and agents who do not (speculators) have different incentives to acquire information. Multiple equilibria may arise but, in a given equilibrium, information acquisition by one type of agent precludes acquisition by the other. Speculators may produce either too little or too much information. Information acquisition by hedgers entails an additional welfare cost because of foregone gains from trade. I discuss regulatory implications.

This paper analyzes insider-trading regulations, focusing on two recent proposals: advance disclosure and ''cooling-off periods.'' The former requires an insider to disclose his trading plan at adoption, while the latter mandates a delay period before execution. Disclosure increases stock price efficiency but has mixed welfare implications. If the insider has large liquidity needs, in contrast to the conventional wisdom from ''sunshine trading,'' disclosure can even reduce the welfare of all investors. A longer cooling-off period increases outside investors' welfare but decreases stock price efficiency. Its implication on the insider's welfare depends on whether the disclosure policy is already in place.