This paper investigates the relation between firms' locations and their corporate finance decisions. We develop a model where being located within an industry cluster increases opportunities to make acquisitions, and to facilitate those acquisitions, firms within clusters maintain more financial slack. Consistent with our model we find that firms located within industry clusters make more acquisitions, and have lower debt ratios and larger cash balances than their industry peers located outside clusters. We also document that firms in high-tech cities and growing cities maintain more financial slack. Overall, the evidence suggests that growth opportunities influence firms' financial decisions. Copyright (c) 2010 the American Finance Association.

We present a theory of optimal transparency when banks are exposed to rollover risk. Disclosing bank-specific information enhances the stability of the financial system during crises, but has a destabilizing effect in normal economic times. Thus, the regulator optimally increases transparency during crises. Under this policy, however, information disclosure signals a deterioration of economic fundamentals, which gives the regulator ex post incentives to withhold information. This commitment problem precludes a disclosure policy that provides ex ante optimal insurance against aggregate shocks, and can result in excess opacity that increases the likelihood of a systemic crisis.

This paper presents a theory of location choice that draws on insights from the incomplete contracts and investment flexibility (real option) literatures. We provide conditions under which human capital is more efficiently created and better utilized within industrial clusters that contain similar firms. Our analysis indicates that location choices are influenced by the extent to which training costs are borne by firms versus employees as well as by the uncertainty about future productivity shocks and the ability of firms to modify the scale of their operations. Extensions of our model consider, among other things, endogenous technological choices by firms in clusters and how behavioral biases (i.e., managerial overconfidence about their firms' prospects) can affect firms' location choices.

Capital budgeting in multidivisional ¢rms depends on the external assessment of the whole ¢rm, as well as on headquarters'assessment of the divisions. While corporate headquarters may create value by directly monitoring divisions, the external assessment of the ¢rm is a public good for division managers who, consequently, are tempted to free ride. As the number of divisions increases, the free-rider problem is aggravated, and internal capital markets substitute for external capital markets in the provision of managerial incentives. The analysis relates the value of diversi¢cation to characteristics of the ¢rm, the industry, and the capital market.RECENT LITERATURE SUGGESTS that corporate diversi¢cation is out of style. However, the fact remains that many corporations are remarkably diversi¢ed: In 1992, 87 percent of the 500 largest U.S. public companies operated in more than one SIC code (Montgomery (1994)). Since most large ¢rms are multidivisional, their internal capital markets play an important role in the investment decisions of the economy. I study the process by which internal capital markets channel funds within corporations, focusing on the following e¡ects. Corporate headquarters can create value in a multidivisional ¢rm by monitoring division managers and e⁄ciently allocating funds across divisions. On the other hand, each division manager in a multidivisional ¢rm takes the external perception of the whole ¢rm as a public good, and is tempted to free ride on this perception.In the model, division managers can take costly, unobserved actions that increase divisional pro¢ts. Divisional pro¢ts also increase with divisions' e⁄-ciency levels, which are unknown ex ante. External investors and corporate headquarters draw inferences about e⁄ciency from pro¢ts, while corporate headquarters has access to inside information that can also be used to draw infer-

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