the problems and opportunities facing the financial services industry in its search for competitive excellence. The Center's research focuses on the issues related to managing risk at the firm level as well as ways to improve productivity and performance. The Center fosters the development of a community of faculty, visiting scholars and Ph.D. candidates whose research interests complement and support the mission of the Center. The Center works closely with industry executives and practitioners to ensure that its research is informed by the operating realities and competitive demands facing industry participants as they pursue competitive excellence. Copies of the working papers summarized here are available from the Center. If you would like to learn more about the Center or become a member of our research community, please let us

A financial institution that finances and monitors firms learns private information about these firms. When the institution seeks funds to meet its own liquidity needs, it faces adverse selection (“liquidity”) costs that increase with the risk of its claims on these firms. The institution can reduce its liquidity costs by holding debt rather than equity. Because these costs are passed through to borrowers, firms that depend on monitored finance generally prefer to give the monitoring institution debt rather than equity; an exception is a limited setting resembling venture capital. Institutions with less frequent or less severe liquidity needs have greater appetite for equity and for the debt of more risky borrowers. These predictions are consistent with general patterns of monitored finance. This is a substantial revision of an earlier paper entitled “Monitored Finance, Liquidity, and Institutional

Maturing short-term debt can impose stronger overhang effect than longterm debt does in distorting the firm’s investment and default decisions when the firm refinances its short-term debt in bad times. We derive the optimal maturity structure based on the trade-off between long-term overhang in good times and short-term overhang in bad times. The theory has implications on empirical studies of debt maturity structure, understanding the excessive defaults and underinvestment during recessions, market-based pricing of credit lines, and firm’s cash holdings.

Abstract: This paper reviews, appraises, and critiques theoretical and empirical research on the connections between the operation of the financial system and economic growth. While subject to ample qualifications and countervailing views, the preponderance of evidence suggests that both financial intermediaries and markets matter for growth and that reverse causality alone is not driving this relationship. Furthermore, theory and evidence imply that better developed financial systems ease external financing constraints facing firms, which illuminates one mechanism through which financial development influences economic growth. The paper highlights many areas needing additional research.

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and depositor-preference

We present new stylized facts on bank and firm leverage for 2000–2009 using extensive internationally comparable micro level data from several countries. The main result is that there was very little buildup in leverage for the average non-financial firm and commercial bank before the crisis, but the picture was quite different for large commercial banks in the United States and for investment banks worldwide. We document the following patterns: a) there was an increase in leverage ratios of investment banks and financial firms during the early 2000s; b) there was no visible increase for commercial banks and non-financial firms; c) off balance-sheet items constitute a big fraction of assets, especially for large commercial banks in the United States; d) the leverage ratio is procyclical for investment banks and for large commercial banks in the United States; e) banks in emerging markets with tighter bank regulation and stronger investor protection experienced significantly less deleveraging during the crisis. These results show that excessive risk taking before the crisis was not easily detectable because the risk involved the quality rather than the amount of assets.