This thesis analyses the role of financial institutions in determining asset prices both theoretically and empirically, and consists of three papers. Chapter 1 provides the motivation and a detailed summary of the three papers. Chapter 2 focuses on the hedge fund industry that has come to play a prominent role in today's financial markets due to its explosive growth. Fierce competition for funds generates relative performance objectives for managers. This paper studies how a hedge-fund manager's investment decision is affected by her tournament concern, incentive contract and liquidation threat. Chapter 3 examines the impact of both managerial capital and delegated capital on asset-market equilibrium by generalising the marginal investor to be a portfolio manager who is paid a relative performance fee. This chapter studies whether it is possible to stabilise financial markets by adopting a less centralized approach based on the idea of altering institutional incentives before a crisis rather than remedial actions after a crisis. Given that the model in Chapter 3 is an example of equity risk-capital models that fit the facts surrounding bank-based intermediaries, Chapter 4 investigates the characteristics of banks' balance sheets and also suggest that banks' balance sheets convey information on predicting subsequent asset-market variations. Chapter 5 concludes.