This paper documents a new channel for rating-based bond market segmentation, which, in contrast to prior research, is based on nonregulatory investment management practices. A 2005 Lehman Brothers index redefinition provides a quasinatural experiment in which a number of previously high-yield split-rated bonds were mechanically relabeled as investment grade. Although their regulatory standing was unaffected, these bonds had abnormal yield declines of 21 basis points. These valuation changes can be traced to buying by asset-class-sensitive institutional investors for whom these bonds became investable. Reputation, regulation, indexation, and liquidity cannot explain the observed price and trading patterns.

An entrepreneur, with private information about his firm, contracts over two periods with an outside financier, a venture capitalist (VC) or angel. The financier can reduce his information disadvantage by learning about the firm over time. VC financing is scarce relative to angel financing. Further, unlike an angel, a VC may exert effort, which, together with the entrepreneur’s effort, increases the firm’s success probability. The equilibrium VC financing contract ensures optimal effort-exertion by both entrepreneur and VC. We characterize the firm’s equilibrium choice between VC and angel financing, its equilibrium contractual provisions, and the dynamic evolution of its financing contract.

We develop a model in which individual and institutional reputation concerns conflict with one another to study why investment bank reputation concerns may have diminished in recent years. Unproven but talented bankers have incentive to signal their ability through actions that may or may not best serve their clients. In the spirit of Kreps (1990), we treat the bank as a hierarchical firm whose only asset is its institutional reputation for curbing behavior that is suboptimal for the client. The conflict between individual and institutional reputation concerns is more likely to resolve in favor of institutional reputation when firms recruit only the most talented people, and less so when unique ability is especially valuable. We discuss how technological change has contributed to a “star” culture that is unfavorable toward preservation of institutional reputation.

We investigate an asset pricing model with preferences cycling between high risk aversion and low EIS in fall/winter and the reverse in spring/summer. Calibrating to consumption data and allowing plausible preference parameter values, we produce returns that match observed equity and Treasury returns across the seasons: risky returns are higher and risk-free returns are lower or stable in fall/winter, and they reverse in spring/summer. Further, risky returns vary more than risk-free returns. A novel finding is that both EIS and risk aversion must vary seasonally to match observed returns. Further, the degree of necessary seasonal change in EIS is small.

Despite the size and importance of separately managed accounts (SMAs) and collective investment trusts, their characteristics and performance have not been studied in detail. We show that separate account performance is similar to that of index funds and superior to that of actively managed mutual funds. Management supplies a benchmark for each separate account. When the management-selected benchmark is used to measure performance, performance is significantly overstated. Despite this, investors react to differences in performance from the management-preferred benchmark in choosing among SMAs. Finally we find variables that explain both the cross section of alphas and the cross section of cash flows.

Benchmarking, pay for luck, and the large compensation packages given to CEOs in recent years are three major controversial compensation practices. We examine the extent to which variation in the market for CEO talent explains these practices. We find that CEO compensation is benchmarked against other firms only in industries where CEO talent is not firm-specific, and that pay for luck is more prevalent there also. These findings are consistent with theories based on the market for CEO talent. However, CEO compensation levels do not depend on whether CEO talent is firm-specific, which seems inconsistent with the talent competition argument.

The U.S.‐based Financial Accounting Standards Board (FASB) emphasizes that accounting standard‐setting is not and should not be regarded as a “political process.” Employing the case of accounting for stock compensation, I examine a recent debate in which FASB appears to have successfully established and maintained a boundary between a technical accounting process and politics. This case is interesting because an earlier, failed effort to expense stock compensation was described as highly politicized. However, the boundary between technical and political processes was maintained in the more recent episode. I find that a focus on due process, characterizations of existing accounting requirements as anomalous and available measurement methods as reliable, and warnings about the dangers of injecting “politics” into standard‐setting were important to this boundary work. I also find that the boundary work required considerable interpretive flexibility in selecting (or ignoring) the evidence to be used in justifying the standard‐setting project and its conclusions. I conclude by suggesting that a different understanding of what it means to be involved in a “political process” might help all parties understand more fully what is taking place during the accounting standard‐setting process. Attention could be turned to developing processes to facilitate debates over which values should guide decisions occurring throughout the standard‐setting process. To this end, an enhanced standard‐setting process might allow for increased participation in agenda setting, in framing and scoping standard‐setting projects, and in providing opportunities for nonexperts to participate.

We empirically analyze the prevalence and economic underpinnings of closing price manipulation and its detection. We estimate that ∼1% of closing prices are manipulated, of which only a small fraction is detected and prosecuted. We find that stocks with high levels of information asymmetry and mid to low levels of liquidity are most likely to be manipulated. A significant proportion of manipulation occurs on month/quarter-end days. Manipulation on these days is more likely in stocks with high levels of institutional ownership. Government regulatory budget has a strong effect on both manipulation and detection.

We show that lenders make price concessions for the right to resell loans and reveal a strong countervailing association between the ex ante probability of loan resale and the initial loan spreads. We disentangle the side effects (reduced monitoring) from the benefits (enhanced liquidity) brought by the secondary loan resales. The average net impact of simultaneously reducing the probability of the presence of resale constraint and raising the probability of resale across the full sample is to lower spreads by 14 basis points. On balance, the secondary loan market provides clear benefits to the issuers of debt.

We examine the connective architecture of the main Colombian payment and settlement systems in order to update what we know about local financial networks, and to elaborate on the main consequences for financial stability. Evidence suggests that local financial networks display a modular (i.e. clustered) scale-free (i.e. inhomogeneous) architecture. Results concur with other real-world networks, and propose new insights and challenges for authorities contributing to financial stability. For instance, (i) traditional reductionist assumptions for modeling financial systems (e.g. homogeneity) may be particularly misleading; (ii) the observed modular scale-free architecture favors robustness and resilience; (iii) the generating process of such architecture overlaps with literature on trading relationships; (iv) carelessly reducing inhomogeneity in financial systems may backfire in the form of a less robust and less resilient financial system; and (v) financial authorities should understand and take advantage of the existing architecture by means of designing and implementing macro-prudential regulation and system-calibrated requirements.