Knowledge that Transforms

This article shows that when a compensation peer firm experiences a significant failure in its say-on-pay (SOP) voting, the focal firm’s stock price is adversely affected, resulting in reduced CEO pay in the subsequent period. This pay-reduction effect is amplified when the board is more powerful, when proxy advisors express concerns about CEO pay, and when the compensation consultant lacks quality. Directors who react to the price drop and cut the CEO’s pay receive higher votes in future director elections, implying a market feedback effect for directors of the focal firm triggered by their peers’ SOP voting failure.

We examine the relationship between shareholder leverage constraints and corporate risk-taking, focusing on its impact on debtholders. Our findings show that mutual fund leverage constraints are related to more risk-taking activities of portfolio companies, inducing higher credit risk and greater risk-shifting concerns for the firms’ debtholders. In response, the debtholders raise borrowing costs and tighten lending conditions. These effects intensify for firms facing higher levels of conflict between debtholders and shareholders and when mutual funds exert greater influence over firms. Econometric analyses, including instrumental variable specifications and asset management company mergers, support a causal interpretation.

We study the information content of corporate insiders’ trades after earnings announcements. We find little evidence that insiders trade on foreknowledge of material information in the post-SOX period. Conditioning on short-selling activity as a proxy for demand of arbitrageurs who exploit short-term mispricing, we show that insiders profit from selling because of their ability to exploit short-term mispricing after earnings releases. In contrast before SOX, insiders do take advantage of foreknowledge of material information while selling. Insider purchases are based on foreknowledge of material information both before and after SOX, but they are rare and have small economic magnitude.

This article studies the importance of corporate boards through a learning model in which capital markets learn about incoming directors’ quality. The model’s predictions are tested across a large sample of director appointments. Estimates show that governance-related uncertainty accounts for about 10% of stock return volatility when a new director joins. The learning framework provides a theoretically grounded approach to identify when directors matter more to investors. The analysis shows that director importance varies with board composition and firm attributes: Investors perceive directors as more important on boards with greater generational diversity, in smaller firms, and firms with higher knowledge capital.

This study examines how changes in political leadership and rising U.S. polarization flow through societal culture to corporate culture. Using quasi-experimental methods, we find that executives adjust culture messaging in earnings calls on extensive and intensive margins across varying political contexts. These changes follow two pathways: under political alignment, executives emphasize their firm’s culture, motivated by pride; and under political misalignment, executives reduce cultural messaging—particularly innovation, quality, and respect—due to lower perceived growth opportunities. Additional tests reveal these changes reflect strategic communication rather than fundamental cultural changes. Our findings highlight how cultural messaging varies with political context.

This study provides direct evidence of the association between debt–equity conflict and investment efficiency in financially distressed firms. Leveraging a unique institutional setting in Japan, we examine the impact of lender-affiliated directors on the managerial decisions of their borrowers. Although banker-directors do not influence firms at low risks of default, their presence leads to more conservative financial decisions in distressed firms, thereby mitigating shareholder exploitation. They also reduce information frictions to prevent overinvestment and underinvestment. However, despite within-firm efficiency gains, potential spillover effects on other stakeholders raise questions about the broader welfare implications of this debt–equity conflict mitigation.

Stocks that are expensive to borrow underperform significantly and for long periods of time. Every share must be held by an investor who does not lend it out and, hence, loses money. I find no evidence that investors hold these stocks in anticipation of lending them in the future. Instead, investors appear to hold these stocks for short-term trading. When turnover is high, high-fee stocks are overpriced and underperform. When turnover is low, high-fee stock prices are low, and they earn positive returns. More Robinhood investors hold shares when turnover is high than when it is low.

We show that banks use industry knowledge acquired through corporate lending in mortgage lending, a phenomenon we refer to as the “industry expertise channel.” Specifically, banks that specialize in particular industries expand their mortgage lending activity in regions where those industries are concentrated. The impact of industry expertise increases with information asymmetry and borrower risk. In addition, mortgages originated from this channel contain more soft information and perform better. The effect of the channel increases after unexpected industry distress and the 2008 financial crisis, suggesting that the effect is likely causal.

Using model-free skewness measures that exploit the asymmetry in semivariances and option data from the over-the-counter currency market, we find that buying currencies with a high skewness risk premium (SRP) and selling currencies with a low SRP generates high returns and a Sharpe ratio. Asset pricing tests—which control for omitted variables and measurement errors—show that a SRP factor enters the currency pricing kernel and is central to the pricing of risks inherent in a broad currency cross section of 60 portfolio excess returns. These results imply that skewness risk is a strong and priced source of currency risk.

This article examines how the entry of commercial lenders (CLs) transforms microfinance markets, focusing on borrower outcomes and market-wide spillovers. Using detailed credit registry data, we show that increased competition improves loan terms for both graduating and staying borrowers, generating sustained benefits. Our setting also allows us to document what happens when entry fails and entrants retreat following a crisis. Despite increasing defaults, borrowers who graduate to banks experience long-term gains, particularly through lower borrowing costs. Our findings highlight the broader benefits and risks of fostering competition in microfinance, providing valuable insights for policymakers and financial inclusion initiatives.