This paper investigates the structure of outside investment in a profitable entrepreneurial venture. Though efficient, financing the venture up front may be infeasible because the entrepreneur cannot commit to not renegotiate down the outside investor's claim once she's sunk her investment. Staging the investment over time helps to mitigate this commitment problem. The early rounds of investment create collateral that support the later rounds. The author characterizes the optimal staged investment path and shows how it is affected by various features of the venture. The predictions of the model are consistent with observations on staged financing in venture capital.

This paper examines the relationship between deposit insurance and risk-taking behavior within the credit union industry. Time series tests employing industry average financial ratios for federal and state credit unions did not support the increased risk-taking hypothesis. Although federal credit union capital declined immediately following the adoption of deposit insurance, this was most likely the result of reduced capital requirements, not deposit insurance. Liquidity and loan delinquency ratios had a negative time trend coefficient, implying a decline in risk-taking behavior during the post-insurance period. Cross-sectional test results employing Iowa state-chartered credit union data indicated that insured credit unions were better capitalized and more liquid than their uninsured counterparts. Overall there was no evidence that the adoption of deposit insurance increased the risk-taking behavior of credit unions.

This paper examines the interaction of information technology and the current consolidation in the financial services industry. It suggests that an important reason for financial service firms to consolidate and not outsource their information technology may be to retain the strategic option to be more diversified firms that offer both financial and information services in the future.

The twelfth century rabbinic scholar Maimonides proposed a maximum class size of 40. This same maximum induces a nonlinear and nonmonotonic relationship between grade enrollment and class size in Israeli public schools today. Maimonides' rule of 40 is used here to construct instrumental variables estimates of effects of class size on test scores. The resulting identification strategy can be viewed as an application of Donald Campbell's regression-discontinuity design to the class-size question. The estimates show that reducing class size induces a significant and substantial increase in test scores for fourth and fifth graders, although not for third graders.

This study examines whether client satisfaction can help explain cross‐sectional variation in Big 6 audit fees paid by Fortune 1000 clients. After controlling for other factors related to audit fees (including audit quality attributes), client satisfaction with the audit team is positively associated with fees. It appears that a dimension of client satisfaction unrelated to audit quality attributes is the factor associated with an audit fee premium. This dimension of satisfaction may reflect other aspects of service quality not documented in the literature, or it may simply enable an auditor to earn economic rents through enhanced bargaining power. Client satisfaction with the audit firm does not appear to be priced in this segment of the audit market. The results are consistent with the view that a Big 6 audit is a service that is differentiable in the eyes of client management, and the results highlight the importance of the audit team composition in allowing a Big 6 audit firm to differentiate the audit product. Also, if auditors are earning local rents due to enhanced satisfaction levels, then a perfect competition model may not be appropriate for the audit services market.

This study examines whether personally performing other audit tasks can bias supervising seniors' going-concern judgments. During an audit, the senior performs some audit tasks him/herself and delegates other tasks to staff members. When personally performing an audit task, the senior would focus on the evidence related to that task. We predict that such evidence will have greater influence on the senior's subsequent going-concern judgment. The results of our experiment are consistent with our predictions. When provided with an identical set of information, seniors who performed another audit task for which the underlying facts of the case reflected positively (negatively) on the company's viability, subsequently made going-concern judgments that were relatively more positive (negative). Our results also demonstrate that the well-documented tendency of auditors to attend more to negative information does not always dominate auditors' information processing. Subjects who performed the task for which the underlying facts reflected positively on the company's viability directed their attention to such positive information and, consequently, both their memory and judgments were more positive than those of subjects in the other conditions. Recent findings indicating that biases in seniors' going-concern judgments may not be fully offset in the review process are discussed along with other potential implications of our results.

We point to the vast empirical literature in banking to argue that the current expansion of scale and scope in banking represents a puzzle. We then present two explanations that help us to understand why banks are getting bigger and doing more. Our explanations suggest that banks may be doing this to increase their shareholders' wealth and/or merely to enhance the reputation of their management (CEOs). The latter could lead to herd behavior involving banks that increase size and scope despite a dissipation of shareholders' wealth. Alternatively, increasing size and scope may offer strategic benefits (and hence increase shareholder wealth) in an environment with sufficient profitability in current operations and substantial uncertainty about future core competencies. We explore conditions under which either one of these competing explanations may dominate.