Knowledge that Transforms

We collect data on ranges of hypothetical asset liquidation values disclosed in U.S. Bankruptcy Court filings. We use this historical information to construct a firm-specific measure, “RecRisk,” which captures asset recovery risk through the uncertainty surrounding asset valuations in liquidation events. We document that higher RecRisk is associated with smaller syndicated loan amounts as a percentage of available collateral, more and tighter performance covenants, and increased loan spreads for borrowers with high credit risk. High RecRisk borrowers also experience lower secondary loan market prices and reduced liquidity for loans with high credit risk. When borrowers become financially distressed, high RecRisk is further associated with declining loan prices and reduced ownership by Collateralized Loan Obligations, the dominant investors in the leveraged loan market. Overall, our results indicate that loan contract terms and prices reflect recovery risk faced by lenders. Data Availability: Data are available from the sources cited in the text. The authors can provide the RecRisk measure at the firm-year level upon request.

Annuities, long‐term care insurance, and reverse mortgages remain puzzlingly unpopular to manage post‐retirement longevity, health, and housing price risks. We use a flexible life‐cycle model structurally estimated with a unique stated‐preference survey experiment of Canadian households to understand why. Key factors include high risk aversion, concern over long‐run risks, strong discounting of valuation in disability states, imperfect housing substitutability, and bequest motives. The remaining disinterest is accounted for by information frictions and inertia. We also document evidence of public insurance crowding out, spousal co‐insurance, and responsiveness to product bundling.

The PCAOB posits that audit partner and manager involvement, primarily through greater supervision and review (“oversight”) of audit engagements, is an important determinant and indicator of audit quality. We test this notion by empirically examining the link between staffing leverage, as measured by an office's ratio of audit partners and managers to audit employees, and audit outcomes from 2008 to 2022. We find staffing leverage is associated with lower rates of client misstatements, comment letters, and PCAOB inspection deficiencies, suggesting higher audit quality. When disaggregated, the association pertains to both partners and nonpartner managers. This relation is stronger for more complex clients and for offices with better management. We also find that staffing leverage measured at the firm level predicts audit quality, and that both office‐ and firm‐level staffing leverage are incrementally informative of audit quality, suggesting disclosing audit oversight metrics at multiple levels could be beneficial. However, the association between firm‐level staffing leverage and audit quality is statistically detected only within Big 4 audits. These findings suggest that audit committees, investors, and regulators can use audit‐office partner‐staffing and manager‐staffing leverage as an informative indicator of audit quality, particularly for complex engagements.

We present a model of competition between environmental, social, and governance (ESG) raters who acquire information about multiple unrelated categories and sell ratings. Raters specializing in different categories maximize the amount of information transmitted and surplus, and can be an equilibrium outcome. When investors place a high value on ESG performance across multiple categories, the unique equilibrium is for the raters to generalize—splitting their effort among the categories, resulting in less informative ratings. Greenwashing by firms can make generalization the only equilibrium. We also demonstrate that specialization maximizes ratings disagreement, and thus empirical measures of disagreement may be poor measures of surplus.

We experimentally study decentralized one-to-one matching markets with transfers. We vary the information available to participants, complete or incomplete, and the surplus structure, supermodular or submodular. Several insights emerge. First, while markets often culminate in efficient matchings, stability is more elusive, reflecting the difficulty of arranging attendant transfers. Second, incomplete information and submodularity present hurdles to efficiency and especially stability; their combination drastically diminishes stability's likelihood. Third, matchings form ``from the top down'' in complete-information supermodular markets, but exhibit many more and less-obviously ordered offers otherwise. Last, participants' market positions matter far more than their dynamic bargaining styles for outcomes.