Mechanism design enables a social planner to obtain a desired outcome by leveraging the players’ rationality and their beliefs. It is thus a fundamental, but yet unproven, intuition that the higher the level of rationality of the players, the better the set of obtainable outcomes. In this paper, we prove this fundamental intuition for players with possibilistic beliefs, a model long considered in epistemic game theory. Specifically, • We define a sequence of monotonically increasing revenue benchmarks for single- good auctions, G0 ≤ G1 ≤ G2 ≤ · · ·, where each Gi is defined over the players’ beliefs and G0 is the second-highest valuation (i.e., the revenue benchmark achieved by the second-price mechanism). • We (1) construct a single, interim individually rational, auction mechanism that, without any clue about the rationality level of the players, guarantees revenue Gk if all players have rationality levels ≥ k + 1, and (2) prove that no such mechanism can guarantee revenue even close to Gk when at least two players are at most level-k rational.

In this paper, we test two models of executive pay that have not received much attention in research on Chinese listed companies: managerial power theory and tournament theory. We find that structural power (executive share ownership) and prestige power (executive education) are significantly positively related to executive remuneration, and political power (Executive/Party Secretary duality) positively and weakly related to executive remuneration. We also find that executive directors' organization level (as reflected in executive pay level for each of the three highest paid executives) is positively related to executive remuneration and the relationship is convex, and negatively related to the interaction between executive directors' organization level and government ownership. Tournament prize (executive pay) is not related to the number of contestants in the tournament and is negatively related to the interaction term between number of contestants and government ownership. Finally, earnings per share (EPS) as a measure of firm performance is positively related to the pay gap between contestants and negatively related to the interaction term between pay gap and government ownership. We explore the implications of these findings for reforming corporate governance in China.

The literature examining analyst activity assumes that access to management is valued by analysts and their employers. We propose a readily observable measure of access: How often an analyst is invited to be among the first to ask questions in the Q&A session of an earnings conference call. These “early participants” are more successful in the labor market than peers from the same brokerage when their brokerages close. Our results show that access is valued by both sell-side and buy-side employers and reflects connectivity to management as well as analyst skill dimensions not captured in traditional measures of performance.

Effective in 2009, SFAS 161 requires enhanced disclosures about derivative use and hedging activities. We test for changes to the information environment of firms whose disclosure policy is unaffected by this standard directly. Using a sample of non-users of derivatives, we find an increase in stock liquidity after their critical customers expand derivative disclosures under SFAS 161. The effect persists for one year and becomes insignificant in subsequent years as the firms dial back their voluntary disclosure. The effect is also more salient for firms that have stronger economic links with their customers and for firms whose customers exhibit more significant improvements in derivative disclosures. The findings suggest that the mandatory derivative disclosures due to SFAS 161 lead to short-term positive information externalities along supply chains. Data Availability: Data are available from the public sources cited in the text.

In the wake of the financial crisis, policymakers expressed the concern that the incurred loss model delays loan loss recognition to economic stress periods and thereby exacerbates banks’ lending contraction during these periods. Addressing this concern, the FASB issued Accounting Standards Update 2016-13, which requires large public banks to accrue for loan losses using the current expected credit loss (CECL) approach starting in January 2020. We hypothesize and find that banks that adopted CECL prior to the COVID-19 pandemic increased loan loss provisions and reduced loan growth during the accompanying recession more than other banks. The lending contraction is stronger for adopting banks with low regulatory capital and low loan impairment and is primarily driven by commercial loans. Lastly, we find that counties in which CECL-adopting banks have higher market share experience larger increases in unemployment rates during the recession and slower subsequent recoveries. Data Availability: Data are available from the public sources cited in the text.