This dissertation consists of three chapters that concern leveraged buyouts and the risk- return relationship of distressed stocks. The first chapter uses hand collected cash flow statements to present the origin, ownership and use of cash in leveraged buyouts of large publicly traded U.S. firms by private equity funds between 1980 and 2006. I find suggestive evidence that target firms exhibit inefficient investment in the form of empire building pre-acquisition. Once controlled by private equity funds, firms exhibit a significant decline in investment, sales and asset growth, and employment growth as debt is used to motivate managers and forces the release of excess free cash flows. I do not find evidence of value creation, as the profitability of the underlying assets does not increase under private equity control. There is evidence of an increase in cash flows from financial management expertise. This form of excess cash generation contributes to the funding of dividends but the majority of the funding is from asset sales and reduced investment prior to exit. Cash flow statements are also used to evaluate returns. I find that the IRR generated by underlying assets is insufficient to cover the cost of financing debt, adversely affecting the IRR to equity holders.

The second chapter, co-authored with Harm Schu ̈tt, tests whether leveraged buyouts improve targets operating performance? We hand collect complete, comprehensive financial statements for a sample of 138 large public U.S. firms that were acquired by private equity funds in leveraged buyouts between 1980 and 2006, and we examine the operating performance of these companies. Because of our comparatively large dataset with comprehensive financial statements we can better scrutinize operating performance and the technical accounting issues associated with leveraged buyouts. We find that the acquired firms do not exhibit post-buyout improvements compared to industry peers. In addition to operations, we evaluate outcomes for the acquired firms. In an expanded sample of 531 large public to private leveraged buyouts we find that 109 (21%) subsequently declare bankruptcy or were restructured outside the bankruptcy court while held by private equity funds. Our results suggest that while private equity managers might be savvy investors, they are not better operators of the target companies.

The third chapter explores the breakdown in the risk-return relationship of financially distressed stocks. I model firms in financial distress using an endogenous default model and demonstrate that distressed firms have nonsymmetric return distributions and are systematically mispriced under the CAPM. I propose the use of a CRRA utility model to correct for the mispricing of positive skewness in the return distribution of distressed stocks. I create portfolios using four distress measures and compare the risk-return relationship under both models. I find that the anomalously low return delivered by portfolios of the most distressed stocks is driven by the inclusion of OTC traded stocks.

Many articles examine the quality of financial markets, and propose how to improve it. Most often, the goal is to improve the efficiency of the candidate market, specifically operational efficiency, i.e. the goal is to reduce the transaction costs. Although operational efficiency is one of the most important factors that contribute to the quality of financial markets (or at least the perception of it), several other factors play a role. Fairness, informational efficiency, and stability of financial markets are ultra important. My research exhibits the need to set a standard for quality assessment of financial markets. This purpose demands the illustration of the multidimensional nature of the quality of financial markets and the inadequacy of commonly used measures of market quality to capture it.

When exploring the quality of financial markets, contrary to common practice, I do not limit my attention to the sell-side. I have looked at both the sell-side and the buy-side, the impact of market design changes and new policies on their behavior, and the quality implications of it. However, since there is a lot to say on this enormous subject, I have chosen a principle of selection. I have selected three scenarios in which market quality is adversely affected by endogenous excess volatility induced by market participants' rational behavior.

Excess volatility is defined by Shiller (1981) as the movements in real stock prices that cannot be explained by new information about subsequent real dividends, and by LeRoy and Porter (1981) as the fluctuations in asset prices that are more than is consistent with present value models. They both found excess volatility using very different variance-bounds tests. Since then, however, their methods have been subject to many criticisms; from having little to none statistical significance, to having econometric problems, to their hypothesis requiring the risk neutrality assumption. At the same time, a lot has been done trying to reconcile financial models to the puzzling levels of volatility observed in financial markets.

I approach excess volatility in the three essays from a different angle. I define it as the movements in asset prices in excess of the changes in the fundamental value of the asset, and since it cannot be measured empirically, I have chosen a theoretical approach so I can examine which frictions or behaviors can cause excess volatility. Also, I have focused my attention on volatility inducing frictions or behaviors for which we can find remedies in the form of market design change or policy. The implications of the theories presented can then be tested by implementing pilot programs in any exchange. One such program, the Securities and Exchange Commission's tick size pilot program, is already underway.

In the first essay, I examine the impact of inventory pressure on a single market maker. I present a continuous-time model of liquidity provision with long-lived information and endogenous inventory control. I show that an (l,I_I,I_u,u) inventory control strategy is optimal. The optimal price depends on the inventory level. Furthermore, the instantaneous cost of holding a position (either long or short) to the market maker and the excess volatility in prices are in a direct relationship. The instantaneous cost can be interpreted as adverse selection cost (risk) of holding any non-zero position, cost of capital for holding long positions, and short selling cost for holding short positions. My result suggests reducing short selling costs to market makers, e.g. reducing borrowing cost or allowing naked short selling, decreases the excess volatility they induce as a result of their inventory control strategy.

My main focus in the second essay is on the characteristics of limit-order markets and the impact of market design changes on the incentives, actions, and payoffs of different kinds of liquidity providers. I show that agents with the lowest latency in the market have an incentive to front-run upcoming market orders. This behavior causes mismatch between expected execution prices and realized execution prices, excess volatility in spreads, and excess volatility in execution prices. In this model, the incentive depends on the latency of the fastest traders (not frequency) relative to the rest of the market and the tick size. Then, I examine several possible solutions; from changes to market latency or tick size to "taxing" front-running behavior through pricing of co-location based on order cancellations.

In the third essay, I switch my attention to the buy-side, and present a continuous-time model of trading on private information with uncertainty about the timing of information events. This uncertainty prevents partially-informed traders from knowing the "newness" of their private information. Their trades can cause the price to systematically diverge from fundamentals even when market participants are rational, there are no persistent exogenous demand (or supply) shocks, and there are no restrictions on trade. My result links the behavior of informed rational traders, i.e. the "smart money", to the seemingly manic episodes of price behavior, and suggests policy advice on the importance of transparency in maintaining informational efficiency and stability of financial markets.

Finally, I present recommendations aimed at standardizing a set of measures capable of capturing the multidimensional nature of the quality of financial markets. This is a first attempt to address this enormous subject, and it has not been my purpose to provide a "sufficient statistic" for market quality. I have aimed at providing a first draft to encourage further conversation and investigation. I have included only so much theory as I thought necessary, and have omitted altogether topics, although important, that did not seem to me to help with the comprehension of the problem at hand. Also, I have recorded seemingly unimportant details when I considered them illustrative of the nature of the problem.

Financial intermediaries play an important role in the pricing of financial assets. For example, intermediaries may act on behalf of consumers in deciding how their wealth is invested, or they may act as providers of liquidity. This dissertation explores several ways in which intermediaries impact price informativeness, the transaction costs investors incur, and investor welfare.

In the first chapter, I examine how prices reveal information when intermediaries are informed. Using a model of repeated trade between a long-lived, informed, price-discriminating market maker and risk averse traders with endogenous hedging demands, I first show that traders are weakly better off trading with an informed dealer, as they may learn something about an asset's value in the process of transacting. Second, while long-term incentives can induce an informed market maker to honestly reveal information and increase risk-sharing, they also enable the market maker to hide her information and extract more rents, reducing price informativeness. This less desirable outcome dominates with respect to both the parameter space and a selection criterion. Finally, measures of market quality, such as the transient component of price volatility (illiquidity), may not accurately reflect welfare.

The second chapter discusses how relationships affect prices when intermediaries are concerned about adverse selection. When counter-parties trade in OTC markets, such as those for corporate bonds or derivatives, the lack of anonymity implies that future terms of trade can influence prices today. Using a model of repeated trade between an informed trader and uninformed market makers, I show that information asymmetry can affect the markups charged by dealers in two ways. First, for a given market structure (number of market makers), traders with more private information incur lower trading costs because dealers offer better terms to mitigate adverse selection. Second, even when dealers can not compete directly on price quotes, they compete indirectly by improving the informed trader's outside option, though this competition is imperfect. While repeated trade allows two given counter-parties to ameliorate adverse selection, the maximum number of dealers, and hence the total gains achievable, are limited by information frictions. An empirical implication is that the comparative statics of transaction costs only make sense conditional on market structure.

The third chapter considers the effect intermediaries have as financial advisors, and whether measures of their performance as mutual fund managers accurately reflect the value they add to an economy. Relative to the existing literature, I look at how the presence of mutual funds affects the price of the underlying asset in an economy. Once this pricing effect is accounted for, I show that standard measures of mutual fund performance may not accurately reflect whether fund management is welfare improving

Financial intermediaries are arguably the backbone of every economy, engaged in a multitude of activities, for instance, capital allocation, liquidity provision, insurance and information production and dissemination. Frictionless financial intermediation is the key to developing an efficient and robust financial system. However, frictions exist and identifying and carefully assessing their potential remedies is critical in preventing market failures. This dissertation aims to further the understanding of frictions in financial intermediation performed by banking organisations and their affiliates while channeling savings of households and businesses to fund profitable opportunities.

Chapters 1 and 2 focus on the interactions of hedge funds and prime brokers in short-term debt markets where the former rely on prime brokerages for leverage. In Chapter 1, "Hedge Fund Leverage: The Role of Moral Hazard and Liquidity Insurance", we build a model of hedge fund securing financing from a prime broker to invest in hard-to-value assets. We introduce a novel form of moral hazard - "fraudulent transfers", whereby a distressed fund may utilize its discretion in valuation of hard-to-value assets to transfer them to affiliates to avoid repaying its obligations. These actions may exacerbate liquidity risk for the prime broker and may also lead to a costly legal recourse to enforce contracts. The model provides several new insights. First, it uncovers a new channel for funding liquidity that can explain why illiquid funds fare worse in times of stress and why better governed funds fared better during the financial crisis. Second, the model provides a new testable hypothesis that systematic or idiosyncratic shocks to fundamentals of bank holding companies may spillover to connected hedge funds through internal capital markets. It also offers an identification strategy to distinguish between possible competing hypotheses. Third, strong governance at hedge funds may reduce incentives to invest in profitable opportunities. Fourth, banking reforms such as Supplementary Leverage Ratio, Liquidity Coverage Ratio and Standing Repo Facility intended to improve resilience of banks may also make hedge funds less vulnerable to shocks in the banking sector. Fifth, the model offers a possible reconciliation for the mixed evidence on the impact of leverage on hedge fund survival documented in the literature.

In Chapter 2, "Multi-Prime Financing by Hedge Funds: A Common Agency Perspective", we extend the model studied in Chapter 1 to a model of nonexclusive contracting with a hedge fund raising secured debt from multiple prime brokers for investment in hard-to-value assets. Multi-prime financing makes it harder for prime brokers to manage counterparty risk due to lack of position transparency of the client. In our model, fund positions are transparent. However, as before, the fund may utilize discretion in valuation of these assets to avoid repaying its obligations. The model highlights that "high-quality" funds in the sense of low probability of default may suffer a loss in aggregate funding in comparison to single-prime level. "Low-quality" funds may also suffer a loss in funding, unless they decrease investment in hard-to-value assets thus constraining investment strategy. Together, these results highlight that multi-prime financing in the presence of position transparency may result in reduced investment in illiquid, hard-to-value assets which arguably also have a high rate of return. This provides a new rationale for why funds are reluctant in improving position transparency among their prime brokers. Furthermore, prime brokers may also be worse-off, highlighting that while improving position transparency may ease counterparty risk management for prime brokers, it may not necessarily make them better-off.

In contrast to our focus on inefficient actions on part of the borrower in the first two chapters, Chapter 3, "Board Conduct in Banks" (co-authored with Krishnamurthy Subramanian, Saipriya Kamath and Prasanna Tantri) focuses on inefficient actions that may be taken within banking organizations themselves. Specifically, motivated by several multinational and national reports on the failure of boards of banks in providing risk oversight preceding the financial crisis of 2008, we examine the minutes of Indian banks’ board meetings and offer insights on board conduct on the kind of issues tabled and discussed in bank boards. We find that risk issues account for only 10% of the issues tabled with regulation and compliance accounting for the most (41%), followed by business strategy (31%). Majority of the issues are not deliberated in detail. We interpret the evidence as suggestive of under-investment in risk and over-investment in regulation and compliance by bank boards.

In corporate finance, we study the investment decisions of firms. Most of the time we focus on investments in physical capital, but firms also invest in human capital. A major component of human capital is health capital, and firms already spend a large amount of money on the health of their employees. In 2005, for example, employers in the United States spent more than $500 billion on group health insurance, which firms use to invest in their workers' health capital. Corporate finance has not yet analyzed health expenditures as an investment. This research on health and human capital complements the corporate finance literature on investment in physical capital. Additionally, the results have important welfare implications, which may aid policymakers.

In the first chapter, I show how a firm's health capital investment depends on each employee's human capital, labor productivity, and firm size. Firms mitigate depreciation in a worker's human capital by investing in health to increase the productivity of human and physical capital. Results indicate that firms that have higher labor productivity, are larger, and spend more on research and development invest more in health capital. I estimate the subsequent effect of health capital investment on value using firm-level data on health insurance premiums. To identify the effect, I instrument for health insurance premiums with a time series of state health insurance mandates, state birth rates, and the number of persons covered by health insurance contracts. The marginal effect of health capital investment on firm value is zero, suggesting that firms are in equilibrium with respect to health capital investment. Market to book reflects the value of this investment because health capital is an intangible asset that the book value of assets does not capture. These results have implications for policymakers who target the employer-based system of health insurance provision as both a means of extending coverage and managing utilization.

In the second chapter, I present a model of the health capital investment decision of a firm using a moral hazard framework. Health capital investment increases the probability that a worker is present and productive. The firm cannot verify a worker's health capital investment decision. When a firm invests in health capital, the investment is verifiable because the firm contracts with the insurer. I derive the optimal contract for when the worker and for when the firm invests in health capital. When the firm invests in health capital, the level of investment is higher, wages are less volatile, and wages are higher relative to when the worker invests in health capital. I discuss the welfare implications. In my model, firms invest more than workers because of a production externality and because it is less costly to invest in health capital than to compensate the worker for bearing the risk of an uncertain labor realization. This result improves welfare, contrary to the benchmark that workers consume more health care than is efficient ex post when firms provide health insurance. Unlike the benchmark model of a worker and insurer, my model includes a profit maximizing firm, includes an endogenous probability of getting sick, and allows the insurer to set premiums by anticipating the health care investment level of the insured.

In the third chapter, I discuss how firms hedge risky human capital with health benefit plans. Firms can choose to fully hedge by contracting with an insurance company, remain unhedged by funding benefits out of general assets, or partially hedge by using a combination of insurance and the general assets of the firm. I adapt the model of Froot, Scharfstein, and Stein (1993) to explore the firm's hedging decision. Consistent with the predictions of the model, firms that find external finance costly and that face a convex tax schedule are more likely to hedge. Additionally, the effect of cash flow on investment is lower for firms that partially hedge human capital risk.

Markets serve a price discovery function. In commodity markets, this supports efficient trade between agents with different preferences and endowments. Prices equilibrate so that aggregate supply of a good matches aggregate demand for that good. In financial markets, agents form demands on the basis of both preferences and information about cash flows and discount rates. Here, prices take on additional significance. In the chapters that follow, I explore how markets aggregate private information in experimental and natural settings. Each chapter considers information and aggregation from a different perspective.

Chapter one considers bounded rationality and information aggregation in an experimental forecasting game. I examine the effects of different types of complexity on decision making and information transmission. I focus on two types of complexity: the number of alternatives and the organization of information about risks and rewards. Each of these can prevent subjects from making appropriate choices. My results suggest that simplification of financial decisions, within limits, may improve information transmission while helping individuals make better choices. Though individuals make poor choices in very complex environments, constraining their choices too much also makes it difficult for them to choose well. My experimental setup also enables me to construct forecasts by aggregating information from agents' choices. I show how these complex choice environments can lead to inefficient forecasts.

Chapter two explores the use of markets to elicit and aggregate information in places where these mechanisms do not normally exist. I assemble a novel data set gathered from a corporate prediction market in which managers at a software firm allowed employees to place bets on key variables. I use these data to examine the static and dynamic properties of information within the firm. I find that employees are privately informed about project outcomes. However, information is not evenly distributed across the firm - some groups appear to know more than other about products and sales. To examine the flow of information within the firm, I focus on a subset of bets that were later revised by employees. Revised bets preform well relative to bets pre-revision, suggesting that employees acquire private information over time. Again, the quality of information flow appears related to job function. This study lends insight into the source of managers' private information in a corporate finance setting.

Finally, in chapter three, I focus on the motivations of market participants. I examine a betting market which experienced an exogenous shock to incentives. I use data on bets placed by participants to assess whether tournament prizes elicit exaggerated forecasts. I also study whether changing the value of monetary incentives has bearing on the participants' willingness to make forecasts. I find that, in line with predictions, reducing the proportion of prize winners, appears to increase the riskiness of their bets with no measurable increase in information content. However, contrary to expectations, I do not find that smaller prize values lead to lower participation. This study complements the theoretical literature on forecasting contests that suggests professional analysts have incentives to exaggerate their claims.

This dissertation consists of three chapters that concern financial markets. The first chapter analyzes how financial frictions impact local government infrastructure spending. The US is frequently criticized for its recent poor spending and upkeep in local infrastructure, such as schools, utilities, and roads. I provide evidence that financial frictions in municipal bond markets exacerbate infrastructure underfunding. To demonstrate this, I exploit the differential exposure to government-rescued monoline bond insurers during the financial crisis as a quasi-experiment that affected local government access to municipal bond markets. I show that local governments with more exposure to a government-rescued monoline insurer FSA and its purchaser Assured Guaranty had better borrowing outcomes and spending in capital investments, relative to others that had exposure to non-rescued insurers. Event-study coefficients and difference-in-difference regression estimates show that issuers in the treatment group issue more bonds in the years after 2008, and also spend more on capital investments. The effect is significant for categories of public goods for which federal resources are scarce -- specifically in education, housing development, and some general utilities.

The second chapter analyzes the effect of passive indexing on informed trading. I develop a model of segmented trade that considers the effect of comovement on asset pricing, efficiency, and incentives to acquire information. The main contribution is to show that traders who participate via passive indexes have characteristics of both informed and uninformed traders. They are like uninformed traders as they diversify away all idiosyncratic risk, and so do not seek costly information, but they are alike informed traders as their presence causes any informed trading to be more quickly disseminated into prices. I provide some empirical justification for this model using a regression-discontinuity design around Russell 2000 index inclusions with institutional holding data.

The third chapter explores the asset pricing properties of cryptocurrencies, an emerging type of digital transaction that utilizes decentralized, cryptographic methods to verify ownership. This chapter is co-authored with my dissertation chair Professor Christine Parlour. We provide summary statistics on cryptocurrency return properties and measures of common variation for over 200 digital coins. Secondly, we provide investment characteristics of initial coin offerings (ICOs), a method of crowdfunding that utilizes cryptocurrencies as legal tender. We reconcile these statistics with traditional finance theories and develop a set of empirical facts for this new asset class.

The field of household finance has established a correlation between savings behavior and education, income, and race. This is partly explained by a high discount rate ultimately leading to low social status. Chapter 1 establishes causation in the opposite direction, with a relatively low social status position leading to a relatively high discount rate. The method used is experimental, with 154 subjects interacting in high- or low-status assignments. The subsequent change in intertemporal preference is significantly determined by the status assignment. The effect is strongest among the subjects who initially have higher discount rates and does not depend on the sex of the subject. This result implies low status consumers have higher discount rates and make worse financial choices because of their low social status, a finding that must be addressed in the regulation of consumer financial products.

The evolution of uniquely exaggerated traits in humans is a topic that generates considerable interest and debate. In Chapter 2 I present an integrated theory that is based on the relationship between the individual and the group. This relationship involves diverse incentives---rewards and punishments---being applied by societies to their members, creating an evolutionary force. While the implications of direct incentives have been considered previously, I propose an indirect and potentially far more powerful incentive: social status. Through the awarding and withholding of social status, societies favor diverse psychological and morphological traits including intelligence, knowledge, norm-following, language ability, singing ability, and altruism towards one's group. Social status grants individuals proximate benefits in social interactions and ultimate benefits in inclusive fitness, at least in pre-industrial societies. Hence social status acts as a social incentive and is a component of a wider evolutionary force that I term prosocial selection. In discussing the social bases of prosocial selection, I highlight both the desire of group members to have incentive systems that benefit themselves, and group selection, here the selection of groups with fitter incentive systems. In discussing the psychological bases of prosocial selection, I highlight genetic predisposition, behavioral conditioning, awareness of intrinsic incentives, and awareness of social incentives. Finally, I discuss the altruism generated through prosocial selection, termed social altruism, and contrast it with established theories of altruism. As a coherent theory of the evolution of many human behaviors, prosocial selection requires a considered debate.

Why are low-income households less likely to save than high-income households? In Chapter 3, I argue the cross-sectional relationship is explained by low status consumers being more impulsive. Formal tests using the Survey of Consumer Finances support this Status and Impulsiveness Hypothesis, while the Permanent Income Hypothesis and the Life Cycle Hypothesis are not supported. A decomposition of income allows me to determine the relative contributions of the different hypotheses towards the Income-Savings relationship: the SIH explains 85%; the PIH 14%; and the LCH 1%.

This dissertation studies the effects of asymmetric information and learning on asset prices and investor decision-making. Two main themes run through the work. The first is the linkage between investor decisions and the information used to make those decisions; that is, portfolio choices reflect the nature and quality of available information. The second theme is the interaction between investor learning and price informativeness. The information held by individual investors is reflected in market prices through their trading decisions, and prices thus transmit this information to other investors.

In the first chapter, Asymmetric Information in Financial Markets: Anything Goes, I study a standard Grossman and Stiglitz (1980) noisy rational expectations economy, but relax the usual assumption of the joint normality of asset payoff and supply. The primary contribution is to characterize how the equilibrium relation between price and fundamentals depends on the way in which investors react to the information contained in price. My solution approach dispenses with the typical “conjecture and verify” method, which allows me to analytically solve an entire class of previously intractable nonlinear models that nests the standard model. This simple generalization provides a purely information-based channel for many common phenomena. In particular, price jumps and crashes may arise endogenously, purely due to learning effects, and observation of the net trading volume may be valuable for investors in the economy as it can provide a refinement of the information conveyed by price. Furthermore, the value of acquiring information may be non-monotonic in the number of informed traders, leading to multiple equilibria in the information market. I show also that the relation between investor disagreement and returns is ambiguous and depends on higher moments of the return distribution. In short, many of the standard results from noisy rational expectations models are not robust. I introduce monotone likelihood ratio conditions that determine the signs of the various comparative statics, which represents the first demonstration of the implicit importance of the MLRP in the noisy rational expectations literature.

In the second chapter Do Fund Managers Make Informed Asset Allocation Decisions?, a joint work with Jacob S. Sagi, we derive a dynamic model in which mutual fund managers make asset allocation decisions based on private and public information. The model predicts that the portfolio market weights of better informed managers will mean revert faster and be more variable. Conversely, portfolio weights that mean revert faster and are more variable should have better forecasting power for expected returns. We test the model on a large dataset of US mutual fund domestic equity holdings and find evidence consistent with the hypothesis of timing ability, especially at three- to 12-month forecasting horizons. Nevertheless, whatever timing ability may be reflected in portfolio weights does not appear to translate into higher realized returns on funds' portfolios.

This dissertation consists of two chapters that concern financial intermediation. Many shadow banks rely heavily on bank-sponsored private credit and liquidity support instead of government guarantees. Bank capital regulation cannot be effective without explicitly considering these facilities. In the first chapter of the dissertation, I use a continuous time model with maturity mismatch and bank moral hazard to study the impact of credit and liquidity guarantees on bank capital structure. I focus on a particular type of shadow banking called asset-backed commercial paper (ABCP). When banks provide credit guarantees to ABCP conduits, assuming that the validity of the guarantees is ensured by rating agencies, the commercial paper becomes risk free and is always priced at par. Rolling over the commercial paper is thus costless, so that frequently rolling over the short term ABCP to fund long term assets---a maturity mismatch---has no impact on bank value. Regulators can eliminate a bank's moral hazard by imposing a simple capital ratio requirement. However, the capital ratio requirement is no longer valid if banks use liquidity guarantees in their ABCP conduit funding because the funding maturity becomes important. Moreover, a liquidity guarantee becomes as costly as a credit guarantee when the maturity shortens. Using Moody's ABCP conduit data, I confirm that shorter ABCP maturity causes the bank's return to be more sensitive to the conduit credit loss. Thus, when banks have significant exposure to a liquidity guarantee, the search for a single appropriate risk weight is futile. More sophisticated tests, such as model-based tests are not only necessary but also have to be carried out under stressed scenarios.

The second chapter studies the current London Interbank Offered Rate (LIBOR). Recent investigation reveals banks might have manipulated the London Interbank Offer Rate (LIBOR). With banks concern about derivative position, net interest income and signaling effect, the equilibrium reporting strategy is a monotonic non-linear function of borrowing cost. Current trimming mechanism cannot block tacit collusion: when banks benefit from lower LIBOR, tacit collusion leads to downward biased LIBOR quotes. Signaling effect causes further depressed LIBOR. Equilibrium submissions do cluster together, as people have observed from the data. Comparative statics suggest LIBOR bias spikes during the crisis, due to more dispersed borrowing costs and consumers' less confidence in banks. I propose a direct and \emph{ex ante} budget balanced LIBOR fixing mechanism. Finally, by calibrating the model to the ratio of dispersion among banks' LIBOR submissions to their CDS spreads, I come up with an initial estimation, which matches practitioner's opinions back in 2008, about LIBOR bias during the recent crisis.