Abstract: This paper presents and tests a theory in which firms manage capital structure using simple rules, largely ignoring leverage until it approaches critical thresholds. We formalize this behavior in a structural agency model in which incentive conflicts gain priority only outside a safe leverage range. We structurally identify firm-specific thresholds averaging 8.7% and 76% debt-to-assets, with variation linked to model-predicted determinants including free cash flow,  governance and risk. The model achieves predictive accuracy between 68% and 74%. Our findings help reconcile theoretical predictions with real-world financial decision-making.

Abstract: When estimating the q theory investment equation, it is common to use Tobin's q as a proxy for the unobserved marginal q. A growing literature suggests the possibility of a feedback effect whereby the financial market exerts a direct influence on firm investment decisions. To accommodate this, we extend the standard empirical specification to allow Tobin's q to serve as an error-laden proxy for marginal q while simultaneously directly affecting the firm's investment decision. We estimate the extended specification using two state of the art econometric approaches. First, we bound the parameters using second order moments together with auxiliary restrictions on the signs of the equation coefficients and/or the magnitude of the reliability ratio of Tobin's q. Second, we obtain point estimates using a novel approach that makes use of moments of order higher than two. Our estimates admit a nonzero feedback effect from the financial market and show that the more precise the signal from the financial market is, the more sensitive the management investment decision to it will be.

Abstract: We study government investment across US states and counties in a Q-theoretical framework. We develop novel measures of regional government Qs, derived from municipal bonds, and private sector Qs, derived from a decomposition of corporate Qs. The main findings are that government investment is positively correlated with government Qs and negatively correlated with private sector Qs. We explain these findings with a model in which governments invest to maximize social welfare, considering their impact on private investment. Accordingly, we find stronger effects in regions with large subsidy programs, low levels of corruption, and following adverse employment shocks. Overall, the findings have two key implications: (1) Government investment crowds-in private sector activity, and (2) Governments leverage information from capital markets to inform government investment decisions. 

Abstract: Given rapid advancements in information technology (IT), many observers are puzzled by the slow and uneven rates of technological diffusion across firms. In this paper, we argue that firms’ technology adoption decisions are jointly determined by the degree of skill mismatch that they face in the labor market. To support our model predictions, we leverage large language models with matched data from worker resumes and firm job postings, to analyze how skill mismatch varies across firms that utilize different information technologies. We find that skill mismatch follows a U-shaped pattern as technologies diffuse: skill mismatch is high when new technologies are deployed, declines over time as firms and workers adjust, and rises again as technologies become obsolete. Skill mismatch is substantial not only for technical skills, but also for IT-complementary nontechnical skills such as managerial ability. Additionally, firms invest more in intangible capital and realize lower measured productivity early in the technology lifecycle when skill mismatch is high. Our analysis highlights skill alignment frictions as a central mechanism behind the diffusion of frontier technologies. 

Abstract: Studies often employ truncated samples of publicly listed firms due to the lack of data on private firms. This truncation, however, is not random because listing is a choice for many firms, whereas others cannot list due to their characteristics. The ensuing endogenous truncation entails biased estimates. We develop a novel methodology that corrects for the bias. We apply the methodology to study the determinants of investment. In cross-sectional regressions the bias-corrected investment-q sensitivity turns from significantly slightly negative to significantly positive, thereby lending strong support for the q-theory. Our econometric framework is applicable in various other economic contexts.

Abstract: This paper measures the cost of greening the economy from the customer’s perspective using nearly six million US federal procurement contracts from 2007 to 2024. Green contracts are on average 18 to 43 percent more expensive than comparable non-green contracts. Accounting for endogeneity with a Bartik instrument yields an even higher cost premium. The premium increases with public concern about climate change, declines with experience, and rises with regulatory complexity. Green contracts also involve greater administrative effort, including more modifications and delays. Overall, the green transition imposes substantial but partly transitory costs shaped by public sentiment, learning, and regulation.

Abstract: Although bond insurance intermediaries are frequently relied upon by local governments for external financing, there is significant debate about the value that bond insurers provide. In this paper, we study U.S. drinking water to estimate the real effects of bond insurance on public infrastructure. We show that exogenous reductions in municipalities' access to bond insurance cause local governments to face higher borrowing costs, reduce external bond issuance, decrease investment in water infrastructure, and experience greater drinking water pollution. The evidence supports the view that well-functioning insurance markets for municipal debt have significant real effects on public infrastructure.

Abstract: Local governments often seek credit ratings from multiple agencies for external financing. Rating shopping and catering, the incentives of the rating agencies, and the career incentives of the analysts issuing the ratings may render the ratings interdependent. This paper estimates the feedback among the credit ratings as well as the impact of the ratings on a bond's yield. To this end, we put forward a simultaneous equations model with three features. First, the model allows the bond's latent fundamental (i.e. credit worthiness) and observed characteristics to directly influence its ratings and yield. Second, the model allows each credit rating to influence the other ratings. Third, the model allows each credit rating to influence a bond's yield. To tackle the simultaneity and endogeneity in the model, we make use of higher order moments. We report simulation results that support our novel econometric framework. We report several important empirical findings. First, ceteris paribus, an agency increases its rating in response to another agency increasing its rating. Second, in full equilibrium, the feedback improves the overall quality of the ratings, measured by the reliability ratio. Third, a ceteris paribus increase in a credit rating decreases the bond yield, corroborating the literature's previous findings. Last, we document a separate substantive effect of the latent fundamental on the yield.

Abstract: Debtor rights vis-a-vis creditor during bankruptcy  can evolve over time due to changes in the nature of the prevailing bankruptcy law and its practice. I empirically study such a time-series trend in debtor rights using comprehensive sample of U.S. firms. To this end, I develop a dynamic model to estimate debtor rights and  examine its implications. Larger debtor rights make  debtors more willing to default, which increases borrowing costs. In response,  firms  lower leverage ex-ante. This channel helps to match  joint distributions of  leverage and default probabilities. Structural estimation reveals a  change over time:  debtor rights increased from 1.2% to 4.4%  around the Bankruptcy Reform Act of 1978, and has gradually decreased back to zero in the subsequent four decades.