2 Of the many frustrations of any editor, surely, avoidable delay is the greatest. And this frustration is almost infinitely compounded when in the interim an unexpected death occurs. Professor Ferguson sent this manuscript as a draft; certain questions which he raised in the accompanying letter would normally have been resolved in the exchange of two or three letters or 'phone calls. I placed one call to learn he was ill; rather than press the query, I delayed. When next I 'phoned, I was shocked to learn of his completely unexpected and therefore all the more untimely death. Because the draft he sent contains so much of his own style and vigor, I have elected to print it in this incomplete form. The points he raised in his letter remain unclarified. In the face of this series of events, I have asked Professor Nell to undertake the task initially given to Ferguson. The two rarely saw things in the same way. Thus, the choice of Nell was not intended to finish Ferguson's incomplete assessment. I mention the foregoing simply to explain the unique treatment in these review essays. Of Charles Ferguson's death so little can be said-he was an ebullient souil, and a man of significant originality. -M. P.

Much financial activity is zero-sum. While providing transactional and diversification services to others, participants also prey upon each other. High-ability predators trade opportunistically with less-able prey. In our dynamic model these features amplify real shocks. The presence of more low-ability traders reduces expected losses to high-ability traders, leading to equilibria with high levels of financial activity and employment. Shocks to profits can motivate exit by low-ability traders, rendering those of intermediate skill more vulnerable. Thus, our relatively simple model generates boom-bust dynamics suggestive of Wall Street. (JEL G00, G20, E44)

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

When monitoring is not contractible—so investors monitor only when, at that time, they expect to benefit from doing so—efficient contracts sometimes induce managers to makefalsereports to investors. Because of monitoring discretion, management misrepresentation can produce Pareto improvements by reducing monitoring costs. When costs of renegotiation are small, optimal contracts necessarily induce misrepresentation. Discretionary monitoring also generates an equilibrium role for multiple-security capital structures. When an optimal contract has two investors, securityholder conflict arises endogenously as a means of reducing monitoring costs. It is efficient to write the contract so that one investor's decision to monitor hurts the other investor.Journal of Economic LiteratureClassification Number: G32.

As discussed in Merton (1993, Sections 5 and 6) and here in the section to follow, the effective delivery of many financial services depends critically on the credit-worthiness of the provider financial institution. Such service activities are said to be 'credit-sensitive'. The intermediary's credit standing can cause significant extemality-like effects on the various business activities of the intermediary, even when there are no interconnections among them. For example, the announcement by a U.S. investment bank that it is even thinking of entering into a new merchant-banking activity of extending bridge financing and other interim risk-taking positioning for restructuring firms can materially and negatively affect its over-the-counter derivatives-products business for corporate customers because those customers may perceive the risk of the merchant-banking involvement as jeopardizing the bank's ability to fulfill its obligations on its long-dated contractual agreements. Thus the potential merchant-banking business affects the derivative-products business although there is no overlap of personnel, customer base, location, or employee skill sets between them. The shared credit standing of the institution's individual businesses can therefore cause a significant failure ofthe principle of 'value-additivity', which complicates decentralization of the capital budgeting and financial decisions. The issue of monitoring credit quality are made more complex because those intermediaries such as banks and insurance companies that are principals to customer contractual agreements tend to be 'opaque' institutions, as defined in Ross (1989) and Merton

Abstract We construct optimal portfolios of mutual funds whose objectives include socially responsible investment (SRI). Comparing portfolios of these funds to those constructed from the broader fund universe reveals the cost of imposing the SRI constraint on investors seeking the highest Sharpe ratio. This SRI cost crucially depends on the investor’s views about asset pricing models and stock-picking skill by fund managers. To an investor who strongly believes in the CAPM and rules out managerial skill, that is, a market index investor, the cost of the SRI constraint is typically just a few basis points per month, measured in certainty-equivalent loss. To an investor who still disallows skill but instead believes to some degree in pricing models that associate higher returns with exposures to size, value, and momentum factors, the SRI constraint is much costlier, typically by at least 30 basis points per month. The SRI constraint imposes large costs on investors whose beliefs allow a substantial amount of fund-manager skill, that is, investors who heavily rely on individual funds’ track records to predict future performance. ( JEL G11, G12, C11) In 2005, when we released what ultimately proved to be the final version of this study, socially responsible investment (SRI) had already become a major presence on the investment landscape. In the years since, this approach, now often called “sustainable” investment, has grown even more rapidly and often encompasses a broad set of “ESG” (environmental, social, and governance) criteria. As evidence of the rapid growth, Morningstar (2020) notes, “one need look no further than the nearly fourfold increase in assets that flowed into sustainable funds in the United States in 2019.” Sustainable investing has also received increased attention in the academic literature, in subsequent studies too numerous to list. Some of the studies are especially related to ours in that they also examine mutual funds. In our study, mutual funds constitute an asset universe faced by an investor imposing an SRI/ESG constraint. A number of the subsequent studies use mutual funds to address other dimensions of sustainable investing. For example, Bollen (2007), Benson and Humphrey (2008), Renneboog, Ter Horst, and Zhang (2011), Bialkowski and Starks (2016) and Hartzmark and Sussman (2019) investigate determinants of mutual fund flows into sustainable funds versus other funds. Riedl and Smeets (2017) use survey and experimental data to explore investors’ preferences for sustainable funds. Madhavan et al. (2020) examine sustainable active equity mutual funds, relating factor loadings and residual returns to ESG characteristics. While we focus on mutual funds, our study also intends that the basic aspects of the SRI setting extend to other institutional investors. That intent is supported, for example, by the recent evidence of Bolton and Kacperczyk (forthcoming, 2020) providing broader perspectives on the SRI portfolio tilts of various types of institutional investors.One conclusion of our study is that an SRI/ESG constraint is especially binding for investors wishing to tilt toward value or small-cap funds. It seems reasonable to infer that such is still the case, though we have not updated our formal analysis. For example, Morningstar (2020) identifies, as of 2019, 99 sustainable U.S. equity funds categorized within its 3 × 3 style box that sorts along the dimensions of value/blend/growth and small/mid-cap/large. Of those 99 funds, only 8 are classified as value, versus 24 as growth and 67 as blend. Only 7 of the 99 are small-cap funds, versus 79 large-cap and 13 mid-cap. More generally, our 2005 study is early in noting meaningful differences in factor loadings between sustainable versus other funds, in both three- and four-factor models.An SRI/ESG constraint is also especially binding for investors who see much information in individual funds’ historical alphas. The basic reason we discuss in our study is seemingly still at work. That is, despite the rapid growth noted earlier, the number of sustainable funds is still well less than those in the total fund universe, so many of the highest track records appear among funds outside that subset. Not mentioned in our original study is that the case of an investor who sees much information in historical alpha confronts the argument of Berk and Green (2004): if fund flows rationally respond to historical alpha, an investor will not view historical alpha as being informative about future alpha. That argument relies on investors correctly assessing the degree of fund-level decreasing returns to scale. One might view an investor who sees historical alpha as informative about future alpha as also having beliefs that favor a lower degree of decreasing returns to scale, as compared to other investors. Moreover, the equilibrating effects of fund flows might interact with the nonpecuniary utility that SRI-conscious investors derive from their fund choices, as suggested by the evidence of Bollen (2007) that flows respond to returns differently for SRI funds versus conventional funds. In any event, when prior beliefs admit substantial information from historical alphas, Busse and Irvine (2006) find that Bayesian predictive alphas computed as in Pástor and Stambaugh (2002a, 2002b), as are the alphas in our study, do predict future performance.While not one we address, a question often asked is whether sustainable investments perform better or worse than other investments. A number of studies do pursue this question, obtaining a range of findings that include both higher and lower performance for sustainable investments. Pástor, Stambaugh, and Taylor (forthcoming) discuss the challenge in interpreting such findings’ implications about expected future performance. A wedge between ex ante and ex post performance of sustainable investments arises during any period that witnesses unanticipated shifts in either customers’ demands for sustainable products or investors’ demands for sustainable holdings.1 As those authors note, sorting out such effects is an important challenge for future research. Our study conducts its analysis under a variety of asset pricing models and prior beliefs. In each case, an investor conditions on funds’ past returns and thus takes account of any historical performance differences between the sustainable funds and other funds in our sample. We do not, however, include models in which expected asset returns depend on sustainability. In this respect, our study does not attempt to provide direct evidence about a potential relation between sustainability and expected investment performance.We are grateful to the Review of Asset Pricing Studies for the opportunity to publish our original study, which follows below with only the references updated to reflect subsequent publications. The study’s abstract is also unchanged from its original version.

From 2007 to 2016, S&P 500 firms distributed $7 trillion via buybacks and dividends, over 96% of their aggregate net income, prompting claims that “short-termism” is impairing firms’ ability to invest and innovate. We show that, accounting for both direct and indirect equity issuances, net shareholder payouts by all public firms during this period totaled only 41% of net income. And, during this decade, investment substantially increased while cash balances ballooned. In short, S&P 500 shareholder-payout figures cannot provide much basis for the notion that short-termism has been depriving public firms of needed capital. Received September 23, 2018; Editorial decision November 13, 2018; Editor Andrew Ellul

Abstract We examine the role of race and racial concordance between financial advisors and their local community. We document significant differences in stock market participation based on community racial composition, as well as differences in the characteristics of communities served by minority advisors. Notably, minority advisors are more likely to serve racially concordant communities, which tend to be poorer. We find that racial concordance has only a modest relation with local stock market participation. However, while minority advisors are more likely to leave the industry, this relation is mitigated among advisors located in more concordant communities. (JEL G20, G50, D14, J15)

Abstract Predicted stock issuers (PSIs) are firms with expected high-investment and low-profit profiles that earn extremely low returns. We evaluate alternative explanations for this empirical phenomenon. Our results show top-PSI firms are cash-strapped, have lottery-like payoffs, high volatility, high beta, low liquidity, and high shorting costs. Over the next 2 years, top-PSI firms earn return on assets of −30% per year, report disappointing earnings, and experience strongly negative forecast revisions. They perform poorly in down markets and are six times more likely to delist for performance-related reasons. Overall, we find substantial support for mispricing, some support for nonstandard preferences, and virtually no support for the risk explanation. (JEL G12, G14, G32, G40, G41) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.