We develop a model of ESG investing where firms privately differ in their intrinsic ESG commitment: some value the non-pecuniary return from green investment, while others opportunistically greenwash. A pro-ESG lender can include a monitoring covenant that imperfectly detects greenwashing, while firms can alternatively seek financing in a retail financial market. Monitoring disciplines opportunistic borrowers but requires large repayment concessions that also generate informational rents...

We analyze how blockchain-based financing affects capital allocation to provide early guidance for DeFi regulation. Competition with conventional financial firms raises borrowing costs, incentivizing DeFi firms to shirk their responsibility for managing investors’ funds. While blockchain technology enables collective monitoring, enhancing it without prudential regulation creates gambling dynamics: DeFi firms bet on evading detection when shirking, while investors bet on enforcing responsible behavior to secure...

We study whether regulators should reveal stress test results that contain imperfect information about banks' financial health. Although disclosure restores market confidence in banks, it misclassifies some healthy banks as risky. This encourages banks to choose portfolios deemed safe by regulators, leading to model monoculture and making the financial system less diversified. Under the ex-ante optimal disclosure policy, the regulator addresses this tradeoff by fully...

We develop a model of bailout stigma in which accepting a bailout signals a firm's balance-sheet weakness and reduces its funding prospects. To avoid stigma, high-quality firms withdraw from subsequent financing after receiving bailouts or refuse bailouts altogether to send a favorable signal. The former leads to a short-lived stimulation followed by a market freeze even worse than if there were no bailout. The latter...

We analyze how borrowers’ capital structure affects their incentives to integrate ESG. Borrowers may undertake socially valuable but financially underperforming projects when doing so lowers expected repayments to outside investors. This repayment saving is larger under more repayment-sensitive securities—such as equity-like contracts—whose payoffs vary more strongly with project cash flows. Yet investor competition endogenously reduces sensitivity, undermining incentives to integrate ESG. Financially motivated borrowers therefore...