Chapter 1. Fair value accounting forces institutions to revalue their inventory whenever a new transaction price is observed. An institution facing a balance sheet constraint can have incentives to suspend trading in opaque over-the-counter markets to avoid marking-to-market. This way the asset's book valuation can be kept artificially high, thereby relaxing the institution's balance sheet constraint. But, the institution loses direct control of its asset holdings, leading to possible excessive risk exposure. An institution optimally balances this trade-off when choosing the point beyond which it suspends trading. Outside investors, who do not know at what price the asset would trade, reduce their valuation the longer the asset has not traded. Their expected discount from book value is convex in time since last trade and robust to parameter misspecifications.

Chapter 2. Hedge funds face performance related withdrawals to their assets under management. As hedge fund managers' compensation is closely linked to the assets under management, they optimally take outflows into account in their investment decisions. I solve a continuous time investment model where fund flows are connected to the relative distance of the current assets under management to their high-water marks—also known as the current drawdown—to show that: (i) managers become more conservative the closer they are to the high-water mark; (ii) the possibility of stronger future outflows makes the manager more conservative close to the highwater mark; (iii) this conservatism is reversed as current outflows become larger—the stronger current outflows, the more risk the manager will take on even though the risk-return tradeoff stays constant; (iv) waiving fees can be optimal for the manager when far below the benchmark.

Chapter 3, joint with Ing-Haw Cheng. The model investigates how debt and equity interact within a firm. Each debt contract has uncertain maturity. Creditors can either rollover the debt or receive face value when their debt matures. When creditors stop rolling over debt the survival of the firm is affected. There is a probability of inefficient forced liquidation once creditors stop rolling over debt. On the equity side, a manager has control over how the firm is run, and he has an technology to risk-shift. The presence of debt introduces risk-shifting incentives that interact with the rollover decisions, and we show that maturity and rollover decisions discipline the manager. We are also able to quantify the inefficiency loss of rollover risk and risk shifting. An interesting result is that the risk-shifting technology can be socially beneficial for certain maturities. Once creditors stop rolling over debt, the value of the whole firm behaves like an option and risk-shifting becomes beneficial by increasing the probability of the project recovering out of the ‘no-rollover’ interval.