This study examines battles between short sellers and firms. Firms use a variety of methods to impede short selling, including legal threats, investigations, lawsuits, and various technical actions intended to create a short squeeze. These actions create short sale constraints. Consistent with the hypothesis that short sale constraints allow stocks to be overpriced, firms taking anti-shorting actions have in the subsequent year very low abnormal returns of about −2% per month.

Abstract The presence of shadow banks in corporate term loan syndicates adversely affects credit lines’ liquidity provision, despite shadow banks not directly funding credit lines. Within the same syndicated loan deal, shadow banks attract not only riskier borrowers but also fewer banks as co-lenders, both in the term loan and in the credit line. Furthermore, credit lines in deals funded by shadow banks, compared to those without shadow bank participation, are smaller, with shorter maturities, and lower drawdown rates. Overall, our results highlight that syndicated loan deals with a strong presence of shadow banks offer borrowers lower liquidity protection. JEL G21, G22, G23

I provide a unified explanation for shareholder ownership, partnerships, mutuals, government ownership, cooperatives, and vertical and horizontal control: each ownership form constitutes a variation on a single underlying theme, the assignment of ownership to a subset of firm stakeholders. When not every facet of a transaction is contractible and high-powered incentives might divert investment toward the transaction’s contractible facets, to the overall transaction’s possible detriment, optimal organizational ownership allocates the right to set the power of managerial incentives to those stakeholders most affected by the noncontractible facets of the organization’s paramount transaction. Received August 3, 2016; editorial decision August 2, 2017 by Editor Uday Rajan.

We analyze mutual fund industry selectivity—the performance of a fund’s industry allocation relative to the market. We find that industry selection accounts for a full third of fund performance based on two-digit standard industrial classification (SIC) codes, with the remaining attributable to the performance of individual stocks relative to their own industries. More importantly, we find that industry-selection skill drives persistence in relative performance. Unlike stock-selection ability, industry selectivity is not eroded by increasing fund assets. Our results suggest that accounting for a manager’s ability to pick outperforming industries provides information beyond standard performance measures that can enhance a fund investor’s future performance. (JEL G11, G14, G23)

Abstract What distribution best characterizes the time series and cross-section of individual stock returns? To answer this question, we estimate the degree of cross-sectional return skewness relative to a benchmark that nests many models considered in the literature. We find that cross-sectional skewness in monthly returns far exceeds what this benchmark model predicts. However, cross-sectional skewness in long-run returns in the data is substantially below what the model predicts. We show that fat-tailed idiosyncratic events appear to be necessary to explain skewness in the data. (JEL, G10, G11, G12, G13, G14).

Bank managers can buy risky assets through a regulated bank and through an off-balance sheet special purpose vehicle (SPV). The choice of the preferred entity depends on whether bank managers can lower the cost of SPV funding by guaranteeing SPV returns with bank proceeds. When there are no guarantees, using the SPV is more profitable for high levels of the minimum capital requirement, in which case the SPV crowds out the bank. Contrary, when bank managers guarantee SPV returns, the bank needs to operate for the SPV to take advantage of recourse to the bank’s balance sheet also when the capital requirement is high. The bank and the SPV intermediation become complements.

We examine whether banks better protect themselves against risk-shifting as compared to non-bank lenders by comparing risk management polices across firms that borrow from different lenders using a unique, hand-collected data set of hedging and borrowing practices. Consistent with banks being effective monitors, we find hedging is positively associated with the proportion of bank debt amongst firms with large risk-shifting incentives. We present descriptive evidence showing that banks use covenants as one of the channels to mitigate risk-shifting.

We model the interaction between product market competition and internal governance at firms. Competition makes it more difficult to infer a manager’s action given the realized output, thus increasing the cost of inducing effort. An exogenous change in the incentive to shirk increases managerial slack. However, the effects on firm value are ambiguous; in particular, firm value can increase as slack increases. As a result, empirical tests that focus on changes in value may not capture changes in the level of slack. We also provide conditions under which increased competition leads all firms to switch from high to low effort.

Abstract We reconsider the excess volatility puzzle through the lens of a model in which agents believe they can predict dividend growth when in fact they cannot. Besides excess volatility in the time series, the model explains the value premium, and the explanatory power of the value factor. In support of the model, we show that analysts’ earnings forecasts align with market valuation and that analysts are far more optimistic about growth stocks than they are about value stocks. Using both survey and price data, we show that the same mechanism can explain the excess returns earned by investing in high-interest rate currencies. (JEL G12, G15, G41)

Do stocks bear a crash risk premium? We examine the empirical performance of the tail index measure from Kelly and Jiang (2014). We find that the tail index explains the cross-section of the discount rate component of returns, but not the cash-flow component. Moreover, in the time series the tail index is uncorrelated with theoretically motivated measures of aggregate uncertainty and systemic risk. In contrast, the tail index Granger causes and is Granger caused by the level of the term structure, and the slope of the term structure Granger causes tail risk. Received June 22, 2016; editorial decision December 23, 2017 by Editor Raman Uppal.