This paper explores the effect of exclusionary "ethical investing" on corporate behavior in a risk averse, equilibrium setting. While arguments exist that ethical investing can inßuence a Þrm's cost of capital, and so affect investment, no equilibrium model has been presented to do so. We show that exclusionary ethical investing leads to "polluting" Þrms being held by fewer investors since "green" investors eschew polluting Þrms' stock. This lack of risk-sharing among "non-green" investors leads to lower stock prices for polluting Þrms, thus raising their cost of capital. If the higher cost of capital more than overcomes a cost of reforming (i.e., a polluting Þrm cleaning up its activities), then polluting Þrms will become socially responsible because of exclusionary ethical investing. A key determinant of the incentive of polluting Þrms to reform is the fraction of funds controlled by green investors. In our model, empirically reasonable parameter estimates indicate that more than 20% green investors are required to induce any polluting Þrms to reform. Existing empirical evidence indicates that at most 10% of funds are invested by green investors.

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This paper develops a model of dynamic capital structure choice in the presence of recapitalization costs. The theory provides the optimal dynamic recapitalization policy as a function of firm‐specific characteristics. We find that even small recapitalization costs lead to wide swings in a firm's debt ratio over time. Rather than static leverage measures, we use the observed debt ratio range of a firm as an empirical measure of capital structure relevance. The results of empirical tests relating firms' debt ratio ranges to firm‐specific features strongly support the theoretical model of relevant capital structure choice in a dynamic setting.

In a model of takeovers under asymmetric information, we identify a separating equilibrium in which the value of the bidder firm is revealed by the mix of cash and securities used as payment for the target. The model predicts that the revealed bidder value is monotonically increasing and convex in the fraction of the total offer that consists of cash. We examine the model restrictions using data from Canada, where mixed offers are both relatively frequent and free of the confounding tax-related options characterizing mixed offers in the United States. We find that the average announcement-month bidder abnormal return in mixed offers is large and significant. However, maximum likelihood estimates of parameters in both linear and nonlinear cross-sectional regressions fail to support the model predictions.This research was in part performed while Eckbo was a Fellow of the Batterymarch Financial Management Corporation. We are grateful for the comments and suggestions of

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