Essays In Banking And Corporate Finance PDF Download

This dissertation consists of 3 self-contained theoretical essays.Essay 1 brings into focus the problem of "manufacturing" tail risk in the banking sector. This work shows that, in order to prevent banks from engaging in tail risk, bank capital regulation should account for the internal agency problem between bank shareholders and bank top managers. It is proposed to design bank capital requirements in the form of incentive-based recapitalization mechanism which would induce bank shareholders to shape executive compensation in such a way as to prevent top managers from engaging in tail-risk.Essay 2 deals with the problem of moral hazard in bank asset management. It proposes the concept of incentive-based bank supervision aimed at preventing moral hazard at a minimum cost to the regulator. It is shown that the intensity of supervision efforts should be gradually adjusted to the bank's financial health: banks in the mild form of distress should be subject to random audits, whereas deeply distressed banks should be placed under temporary regulatory control. To prevent double moral hazard, external auditors involved in supervision should be offered the optimal incentive contract.Essay 3 examines the impact of credit rationing (debt capacity) on corporate investment in the setting with costly debt financing. It is shown that, when credit constraints are binding, the firms with intermediate levels of debt capacity will establish larger investment projects than the firms with relatively low or high debt capacity. This non-monotonicity of investment on debt capacity arises due to the effect of the lump-sum debt issuance costs in the dynamic context of investment.