Existing evidence suggests that the Sarbanes–Oxley Act (SOX) may be beneficial to US investors, but that foreign firms are perhaps less likely to list in the USA after SOX. This raises the question of whether foreign firms avoid listing in the USA after SOX because the Act imposes unnecessary costs upon firms. The objective of this article is to reconcile the US and international evidence by distinguishing between the effect of SOX on controlling shareholders and managers of foreign firms and the effect on minority investors of these firms. Our results suggest that insiders of foreign firms believe that the regulation makes the extraction of value from minority investors more difficult and costly for them. Outside investors in foreign firms, on the other hand, seem on average to believe that SOX is beneficial to them. The combination of these results reconciles the existing US and international evidence regarding SOX.

We find that several factors explain an individual investor׳s style, i.e., the value versus growth orientation of the investor׳s stock portfolio. First, we find that an investor׳s style has a biological basis and is partially ingrained in an investor from birth. Second, we show that an investor׳s hedging demands as well as behavioral biases explain investment style. Finally, an investor׳s style is explained by life course theory in that experiences, both earlier and later in life, are related to investment style. Investors with adverse macroeconomic experiences (e.g., growing up during the Great Depression or entering the labor market during an economic recession) or who grow up in a lower socioeconomic status rearing environment have a stronger value orientation several decades later. Our research contributes a new perspective to the long-standing value and growth debate in finance.

Although it is well known that appearance-based impressions affect labor market and election outcomes, little is known about the role appearance plays in financial transactions. We address this question using photographs of potential borrowers from a peer-to-peer lending site. Consistent with the trust-intensive nature of lending, we find that borrowers who appear more trustworthy have higher probabilities of having their loans funded. Moreover, borrowers who appear more trustworthy indeed have better credit scores and default less often. Overall, our findings suggest that impressions of trustworthiness matter in financial transactions as they predict investor, as well as borrower, behavior. A man I do not trust could not get money from me on all the bonds in Christendom. –John Pierpont Morgan, 1913

We find that differences in individuals' prenatal environments explain heterogeneity in financial decisions later in life. An exogenous increase in exposure to prenatal testosterone is associated with the masculinization of financial behavior, specifically with elevated risk taking and trading in adulthood. We also examine birth weight. Those with higher birth weight are more likely to participate in the stock market, whereas those with lower birth weight tend to prefer portfolios with higher volatility and skewness, consistent with compensatory behavior. Our results contribute to the understanding of how the prenatal environment shapes an individual's behavior in financial markets later in life.

Measuring the impact of political risk on investment projects is one of the most vexing issues in international business. One popular approach is to assume that the sovereign yield spread captures political risk and to augment the project discount rate by this spread. We show that this approach is flawed. While the sovereign spread is influenced by political risk, it also reflects other risks that are likely included in the valuation analysis — leading to the double counting of risks. We propose to use “political risk spreads” to undo the double counting in the evaluation of international investment projects.

We use industry valuation differentials across European countries to study the impact of membership in the European Union as well as the Eurozone on both economic and financial integration. In integrated markets, discount rates and expected growth opportunities should be similar within one industry, irrespective of the country, implying narrowing valuation differentials as countries become more integrated. Our analysis of the 1990–2007 period shows that membership in the EU significantly lowered discount rate and expected earnings growth differentials across countries. In contrast, the adoption of the Euro was not associated with increased integration. Our results do not change when the sample is extended to include the recent crisis period.

We propose a new, valuation-based measure of world equity market segmentation. While we observe decreased levels of segmentation in many countries, the level of segmentation remains significant in emerging markets. We characterize the factors that account for variation in market segmentation both through time as well as across countries. Both a country's regulation with respect to foreign capital flows and certain nonregulatory factors are important. In particular, we identify a country's political risk profile and its stock market development as two additional local segmentation factors as well as the U.S. corporate credit spread as a global segmentation factor.

We examine equity markets’ reaction to the first‐time disclosure of the CEO‐worker pay ratio by U.S. public companies in 2018. We find that firms disclosing higher pay ratios experience significantly lower abnormal announcement returns. Firms whose shareholders are more inequality‐averse experience a more negative market response to high pay ratios. Furthermore, during 2018 more inequality‐averse investors rebalance their portfolios away from stocks with a high pay ratio relative to other investors. Our results suggest that equity markets are concerned about high within‐firm pay dispersion, and investors’ inequality aversion is a channel through which high pay ratios negatively affect firm value.

We propose an exogenous measure of a country's growth opportunities by interacting the country's local industry mix with global price to earnings ( PE ) ratios. We find that these exogenous growth opportunities predict future changes in real GDP and investment in a large panel of countries. This relation is strongest in countries that have liberalized their capital accounts, equity markets, and banking systems. We also find that financial development, external finance dependence, and investor protection measures are much less important in aligning growth opportunities with growth than is capital market openness. Finally, we formulate new tests of market integration and segmentation by linking local and global PE ratios to relative economic growth.