An asset owner designs an asset-backed security and a signal about its value. After experiencing a liquidity shock and privately observing the signal, he sells the security to a monopolistic buyer. Within double-monotone securities, asset sale is uniquely optimal, which corresponds to the most informationally sensitive security. Debt is a constrained optimum under external regulatory liquidity requirements on securities. Thus, the “folk intuition” behind optimality of debt due to its low informational sensitivity holds only under additional restrictions on security/information design. Within monotone securities, a live-or-die security is optimal, whereas additional-tier-1 debt is optimal under the regulatory liquidity requirements.

Firms in emerging markets borrow more in foreign currency when the local currency actually provides a better hedge in downturns. Motivated by this fact, we develop an international corporate finance model in which firms facing adverse selection choose the foreign currency share of their debt. In the unique separating equilibrium, good firms optimally expose themselves to currency risk to signal their type. Crucially, the nature of this equilibrium depends on the co-movement between cash flows and the exchange rate. We provide extensive empirical evidence consistent with this signaling channel and rule out alternative explanations using a detailed dataset including more than 4,800 firms in 19 emerging markets between 2005 and 2021. Our results have implications for evaluating and mitigating risks arising from currency mismatches in corporate balance sheets.

We analyse default risk parameter estimation when borrowers can manipulate, at heterogeneous cost, a covariate used in credit scoring. A qualified version of Goodhart's law obtains: When the posted model utilizes coefficients from clean historical data, coefficients shift subsequently, provided the coefficient on the clean covariate is not zero. As shown, the measurement error resulting from manipulation is negatively correlated with the clean covariate. Such correlation results in slope coefficient overshooting unless noise resulting from cost heterogeneity is sufficiently high. We next evaluate internally consistent fixed point (Nash) models, which may be attained via successive rounds of estimation. If the clean covariate coefficient is not zero, so Goodhart's critique applies, intercept and/or slope coefficients of any Nash model must undershoot clean data counterparts, and the Nash slope coefficient cannot be zero. Finally,we consider Stackelberg leader models, finding that with commitment, the econometrician optimally discourages manipulation with marginal increases (decreases) in the posted model intercept (slope).