We investigate whether uninsured depositors, insured depositors, and general creditors exhibit evidence of quantity market discipline during the recent financial crisis. To establish which types of creditors expect to incur loss, we evaluate the FDIC's expectations about losses to creditors at banks that failed between 2008 and 2010. Our results show that quantity market discipline tends to begin far enough in advance to signal to both banks and supervisors that corrective actions can and should be taken. Furthermore, creditors are able to distinguish between banks of different risk levels. Our findings support several policy implications for encouraging market discipline.

Using a multi-period partial equilibrium model, I demonstrate that a combination of management fees and a time-varying information advantage for a fund manager can account for several empirically observed characteristics of closed-end funds simultaneously. The model is consistent with the basic time-series behavior of fund discounts, accounts for the excess volatility of fund returns, explains why the management fee appears to be an insignificant determinant of discounts, and is consistent with many time-series correlations between discounts, NAV returns, and fund returns. The model also generates novel predictions regarding the relations between asset turnover, discounts, and returns.

In this paper, we examine whether the structure of the chief executive officer’s (CEO) compensation package can explain default risk and performance in bank holding companies (BHCs) during the recent credit crisis. Using a sample of 371 BHCs, we show that in 2006 higher holdings of inside debt relative to inside equity by a CEO after controlling for firm leverage is associated with lower default risk and better performance during the crisis period. We present evidence that before the crisis banks with higher inside debt ratios also have supervisory ratings that indicate stronger capital positions, better management, stronger earnings, and being in a better position to withstand market shocks in the future. Such ex-ante evidence can explain the observed relationship between inside debt, default risk, and performance during the crisis.

Abstract The SEC and FASB recently expressed concerns that investors do not fully assimilate all of the information provided by complex and incomplete derivatives and other comprehensive income ( OCI ) disclosures. My evidence supports these concerns. Specifically, I examine the information content of unrealized cash flow hedge gains/losses for future profitability and stock returns. An unrealized gain on a cash flow hedge suggests that the price of the underlying hedged item (i.e., commodity price, foreign currency exchange rate, or interest rate) moved in a direction that will impair the firm's profits after the hedge expires. Consequently, I find that unrealized cash flow hedge gains/losses are negatively associated with future gross profit after the firm's existing hedges have expired. This association only holds after the firm has reclassified its hedges into earnings, and is weaker for firms that can pass input price changes on to their customers. Finally, investors do not immediately price the cash flow hedge information. Instead, investors appear surprised by future realizations of gross margin, consistent with the view that complex and incomplete disclosures delay pricing. These results are relevant to policymakers involved in the current FASB and IASB project designed to simplify the accounting and disclosure for derivatives and, in particular, cash flow hedges.

I discuss the health transition in the United States, bringing new data to bear on health indicators, and investigating the changing relationship between health, income, and the environment. I argue that scientific advances played an outsize role and that health improvements were largest among the poor. Health improvements were not a precondition for modern economic growth. The gains to health are largest when the economy has moved from "brawn" to "brains" because this is when the wage returns to education are high, leading the healthy to obtain more education. More education may improve use of health knowledge, producing a virtuous cycle.

Abstract We trace directors through time and across firms to study whether acquirers’ access to nonpublic information about potential targets via their directors’ past board service histories affects the market for corporate control. In a sample of publicly traded U.S. firms, we find acquirers about 4.5 times more likely to buy firms where their directors once served. Effects are stronger when the acquirer has better corporate governance, the interlocked director has a larger ownership stake at the acquirer, or the director played an important role during past service. The findings are robust to endogeneity of board composition and controls for contemporaneous interfirm interlocks.

We introduce methods for estimating nonparametric, nonadditive models with simultaneity. The methods are developed by directly connecting the elements of the structural system to be estimated with features of the density of the observable variables, such as ratios of derivatives or averages of products of derivatives of this density. The estimators are therefore easily computed functionals of a nonparametric estimator of the density of the observable variables. We consider in detail a model where to each structural equation there corresponds an exclusive regressor and a model with one equation of interest and one instrument that is included in a second equation. For both models, we provide new characterizations of observational equivalence on a set, in terms of the density of the observable variables and derivatives of the structural functions. Based on those characterizations, we develop two estimation methods. In the first method, the estimators of the structural derivatives are calculated by a simple matrix inversion and matrix multiplication, analogous to a standard least squares estimator, but with the elements of the matrices being averages of products of derivatives of nonparametric density estimators. In the second method, the estimators of the structural derivatives are calculated in two steps. In a first step, values of the instrument are found at which the density of the observable variables satisfies some properties. In the second step, the estimators are calculated directly from the values of derivatives of the density of the observable variables evaluated at the found values of the instrument. We show that both pointwise estimators are consistent and asymptotically normal.

We study contractual arrangements that support an efficient use of time in a knowledge-intensive economy in which agents endogenously specialize in either production or consulting. The resulting market for advice is plagued by informational problems, since both the difficulty of the questions posed to consultants and the knowledge of those consultants are hard to assess. We show that spot contracting is not efficient because lemons (in this case, self-employed producers with intermediate knowledge) cannot be appropriately excluded from the market. However, an ex ante, firm-like contractual arrangement uniquely delivers the first best. This arrangement involves hierarchies in which consultants are full residual claimants of output and compensate producers via incentive contracts. This simple characterization of the optimal ex ante arrangement suggests a rationale for the organization of firms and the structure of compensation in knowledge-intensive sectors. Our findings correspond empirically to observed arrangements inside professional service firms and between venture capitalists and entrepreneurs.