We examine the empirical implications of learning under ambiguity for the cross-section of stock returns. We introduce a theoretically-motivated ambiguity measure and find that ambiguity is priced in the cross-section of average stock returns. Ambiguity is not subsumed by state variables known to predict stock returns, nor by value, size, and momentum factors. In R-squared comparative tests, a model that takes ambiguity into account performs better than empirical implementations of the Bayesian learning model, the intertemporal CAPM, and the four-factor model of Fama and French (1993) and Carhart (1997). (JEL G12)

In this study I empirically examine U.S. publicly traded firms to determine the impact of banking relationships on the future of financially distressed firms. Results demonstrate that obtaining a relationship-backed loan in the six months prior to distress identification significantly increases the probability of future firm emergence from distress. However, this effect decreases as the severity of firm distress increases. These results are robust to variations in banking relationship measures and to addressing endogeneity. This study provides evidence consistent with the value of lending relationships stemming from the ease of transmission of “soft” information within the lender's organization.

We investigate whether a firm’s directors’ and officers’ liability insurance contract at the time of the IPO is related to insured firms’ first year post-IPO performance. We find that insurers charge a higher premium per dollar of coverage to protect the directors and officers of firms that will subsequently have poor first year post-IPO stock performance. A higher price of coverage is also associated with a higher post-IPO volatility and lower Sharpe ratio. Our results are robust to various econometric specifications and suggest that even when the high level of information asymmetry inherent to the IPO context prevails, insurers have information about the firms’ prospects that should be valuable to outside investors.

We investigate the effect of political connections in Italy, for each level of government, on the credit markets and we find robust evidence that politically connected firms benefit from lower interest rates when the political link is at a local level. Our results show that this preferential treatment is stronger when connected firms borrow from banks with politicians on their boards and when the degree of autonomy granted to local loan officers is higher. The latter result provides a novel addition to the literature on the effects of the delegation of lending decisions within the bank. We also show that the effect is stronger in geographical areas where the incidence of corruption is higher. Overall, our results show that on aggregate the impact of political connections on interest rates is limited but it may rise significantly in specific (local) situations due to a combination of factors such as the delegation of lending decisions, a weaker rule of law and some governance characteristics of banks.

In this study, I examine whether firms and executives with long-term political connections through contributions and lobbying incur lower costs from the enforcement actions by the Securities and Exchange Commission (SEC). I find that politically connected firms on average are less likely to be involved in SEC enforcement actions and face lower penalties if they are prosecuted by the SEC. Contributions to politicians in a strong position to put pressure on the SEC are more effective than others at reducing the probability of enforcement and penalties imposed by an enforcement action. Moreover, the amounts paid to lobbyists with prior employment links to the SEC, and the amounts spent on lobbying the SEC directly, are more effective than other lobbying expenditures at reducing enforcement costs faced by firms.

I provide big picture comments on the review of the banking literature in accounting by Beatty and Liao (2014). Beatty and Liao (2014) does a service to the accounting field by providing an intelligent, well organized and accessible point of entry to banking research in accounting. I complement Beatty and Liao by presenting my observations on the role of financial accounting in banking, focusing my discussion on real effects of accounting policy choices on individual bank risk taking and codependence of risk among banks. I also offer ideas on future research directions.

Auctions often involve the sale of many related goods: Treasury, spectrum, and electricity auctions are examples. In multi-unit auctions, bids for marginal units may affect payments for inframarginal units, giving rise to “demand reduction” and furthermore to incentives for shading bids differently across units. We establish that such differential bid shading results generically in ex post inefficient allocations in the uniform-price and pay-as-bid auctions. We also show that, in general, the efficiency and revenue rankings of the two formats are ambiguous. However, in settings with symmetric bidders, the pay-as-bid auction often outperforms. In particular, with diminishing marginal utility, symmetric information and linearity, it yields greater expected revenues. We explain the rankings through multi-unit effects, which have no counterparts in auctions with unit demands. We attribute the new incentives separately to multi-unit (but constant) marginal utility and to diminishing marginal utility. We also provide comparisons with the Vickrey auction.

ABSTRACT We investigate whether recognition on the face of the financial statements versus disclosure in the footnotes influences the amount that financial managers report for a contingent liability. Using an experiment with corporate controllers and chief financial officers, we find that financial managers in public companies expend more cognitive effort and exhibit less strategic bias under recognition than disclosure. This difference appears to be associated with capital market pressures experienced by public company managers as we find that both the cognitive effort and bias exhibited by private company managers are unaffected by placement. As a result, public company managers make higher liability estimates for recognized versus disclosed liabilities. Their liability estimates are similar to those of private company managers for recognition but lower than private company managers’ estimates for disclosure. Our results have implications for auditors and financial statement users in evaluating recognized versus disclosed information for public and private companies.

We analyze the impact of the introduction of the French Tobin tax on the turnover and measures of the liquidity and volatility of the affected stocks with nonparametric tests on individual stocks, difference-in-difference tests and other robustness checks controlling for simultaneous month-of-the-year and size effects. Our findings indicate that the tax produces a significant reduction in turnover and volatility (measured in terms of stock price volatility and the high–low price range) and inconclusive effects on liquidity when the latter is evaluated under the two dimensions of the estimated bid–ask spread and the Amihud (2002) price impact ratio.

Most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state, but most central banks target an inflation rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy. In this survey, we show that the conduct of monetary policy should be analyzed by appropriately accounting for the positive trend inflation targeted by policymakers. We first review empirical research on the evolution and dynamics of U.S. trend inflation and some proposed new measures to assess the volatility and persistence of trend-based inflation gaps. We then construct a Generalized New Keynesian model that accounts for a positive trend inflation. In this model, an increase in trend inflation is associated with a more volatile and unstable economy and tends to destabilize inflation expectations. This analysis offers a note of caution regarding recent proposals to address the existing zero lower bound problem by raising the long-run inflation target. (JEL E12, E31, E32, E52, E58)