Knowledge that Transforms

Journal Article The Review of Corporate Finance Studies Volume 5 Number 1 March 2016 - Table of Content Get access The Review of Corporate Finance Studies, Volume 5, Issue 1, March 2016, Page i3, https://doi.org/10.1093/rcfs/cfv010 Published: 12 February 2016

Journal Article The Review of Corporate Finance Studies Volume 5 • Number 2 • September 2016 - Front Cover Get access The Review of Corporate Finance Studies, Volume 5, Issue 2, September 2016, Page i1, https://doi.org/10.1093/rcfs/cfv011 Published: 12 August 2016

Journal Article The Review of Corporate Finance Studies Volume 5 Number 2 September 2016 - Table of Content Get access The Review of Corporate Finance Studies, Volume 5, Issue 2, September 2016, Page i3, https://doi.org/10.1093/rcfs/cfv014 Published: 12 August 2016

Journal Article The Review of Corporate Finance Studies Volume 5 • Number 1 • March 2016 - Front Cover Get access The Review of Corporate Finance Studies, Volume 5, Issue 1, March 2016, Page i1, https://doi.org/10.1093/rcfs/cfv007 Published: 12 February 2016

We study the relation between state-level public corruption in the United States and firm-value and firms' disclosure policies. Consistent with our hypotheses, firms have significantly lower value (Tobin’s q) and informational transparency in more corrupt areas. Local corruption has a less negative effect on industries that sell primarily to the government, suggesting a quid pro quo between these firms and public officials. Several tests address endogeneity concerns: for example, firms located in different states but close to state borders are affected by differences in state-level corruption, indicating legal jurisdiction matters despite similar local conditions. Received date: March 6, 2015; accepted date: December 7, 2015 by Editor Paolo Fulghieri.

We study transactions in which sellers fear being underpaid because their outside option is better known to the buyer. We rationalize various observed contracts as solutions to such smart buyer problems. Key to these solutions is granting the seller upside participation. In contrast, the lemons problem calls for granting the buyer downside protection. But, in either case, the seller (buyer) receives a convex (concave) claim. Thus, contracts usually associated with the lemons problem, such as debt or cash-equity offers, can be equally well manifestations of the smart buyer problem, although the two information asymmetries have opposite cross-sectional implications.

In our model multiple innovators compete against each other by submitting investment proposals to an investor. The investor chooses the least expensive proposal and the timing of the investment. Innovators privately learn the cost of investing. The investor has to compensate the innovators for their reservation wages, but competition makes screening easier and helps to erode innovators’ informational rents. Consequently, competition leads to faster innovation, because the investor has less need to delay expensive investments. With an endogenous number of innovators investment timing becomes first best.

We find that the degree of expected idiosyncratic skewness in seasoned equity issuers’ stock returns is an important determinant of flotation costs and subsequent abnormal stock performance. High skewness issuers incur significantly greater offer price discounts, particularly when institutional share allocation is largest, pay higher gross underwriting spreads, and exhibit poorer stock performance in the three years after issuance, all compared to low skewness issuers. These results suggest that skewness-induced overpricing increases the flotation costs of seasoned equity offers and leads to poor subsequent stock performance.

How are neighboring firms affected when a bank learns more about a given firm? We analyze exchange-rate-induced movements of Peruvian firms across a threshold that governs their regulatory treatment by banks. Firms that cross the threshold supply more information to their banks and experience a substantial increase in financing. We find positive spillover effects: the neighbors of the above-threshold firms also experience increased financing. These spillovers are confined to neighbors sharing a bank, and the performance of new loans to these neighbors improves, suggesting that the bank has become better informed about other local firms.

We study risk-shifting behavior in a laboratory experiment, a setup that overcomes methodological hurdles faced by empiricists in the past. The participants are high-level managers. We observe risk shifting in a simple setup, but less so in a setup with a continuation value. Reputation effects also reduce risk shifting. When combined, a continuation value and reputation effects eliminate risk shifting. Our findings shed light on environments in which risk shifting is unlikely to happen, and why earlier studies produced conflicting results. In particular, our findings show that managers’ concerns with their own reputations are an important factor that mitigates risk shifting.