Asset pricing models predict a strong connection between the real risk-free interest rate and the macroeconomy, but prior research finds little empirical support for the connection when examining expected growth. This paper documents a robust relation between the interest rate and macroeconomic uncertainty (i.e., conditional variance). Consistent with precautionary savings, high uncertainty is associated with a low interest rate using numerous data sources, time periods, and measures. A relation between habit and the interest rate disappears after including uncertainty, and the relation is stronger using long-run uncertainty. The results imply that analyses of the interest rate without uncertainty are seriously incomplete.

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.

Increased awareness of the importance of non-bank financial infrastructures has brought increased concern about the potential for bailouts and the resultant moral hazard problem. This paper examines the question with regard to derivatives central counterparties. We consider the layers of protection that derivatives central clearing parties (CCPs) have established in the absence of an expectation of regulatory rescue. We then provide a model of the tension between the desire for ex post rescue of a systemically important financial infrastructure and the desire to maintain ex ante discipline on the infrastructure. The model illustrates the factors that should lead to relaxation or tightening of the financial regulator's discretion for rescue. We consider examples of failures of derivatives CCPs in order to highlight the importance of these considerations.

Defined benefit pension and health care plans are important for firm leverage around the world. While consolidating off-balance sheet post-retirement plans increases effective leverage by 32%, firms reduce their level of regular debt by only 22 cents for every dollar of projected benefit obligation, yielding overall 23% higher total leverage of plan sponsors compared with similar firms without post-retirement plans. The most important driver of substitution rates between regular debt and post-retirement obligations is rule of law, followed by labor market freedom and taxes. In contrast, pension guarantee funds and priority of unfunded pension obligations are less important for substitution rates.

IN THE FALL OF 1942, as the Allied and Axis nations marshalled their forces for decisive battles at Guadalcanal, El Alamein, and Stalingrad, Joseph A. Schumpeter's Capitalism, Socialism, and Democracy (CSD) was published. Perceived by Schumpeter at the time as a little book of essays somewhat in the nature of a potboiler,' it distilled for the intelligent lay reader almost forty years' thought, observation, and research (1942, p. ix) by the Austrian economist-statesman-banker turned Harvard don. Fifty years later, it remains relevant. In particular, it brought into the main stream of economic discourse the question of what market structures were most favorable to technological change and hence economic growth. Both in the United States and abroad, policy debates over that issue persist. Schumpeter's conjectures on market structure, the work by economists to extend them, and the continuing policy puzzles are the main focus of this anniversay essay. II. The Challenge

Do merger bonuses to target CEOs facilitate a wealth transfer from target to acquirer shareholders? We test this hypothesis against an alternative that bonuses enable a useful contractual revision in compensation contracts when takeovers generate small synergies. When target CEOs get a merger bonus, acquirers pay lower premiums, but they also typically get less in the form of low synergies. Moreover, both stock and accounting returns to the acquirers are lower on average in deals with target CEO bonuses. These results support the contractual revision alternative. Nevertheless, wealth transfer occurs when merger bonuses are present in deals where targets exhibit high pre-takeover abnormal accruals or are subject to SEC enforcement actions.

Hence, even if the partial equilibrium analyst knows full well that the actual situation is not really a competitive one, he probably will still make a first try using the competitive model with good old-fashioned profit maximization. And if the results appear too odd, appropriate qualifications may still be able to take care of them more simply than if he had started with a cumbersome managerial model. (In saying this, I am showing my bias.) [18, p. 30]

We investigate why only some banks use regulatory arbitrage. We predict that banks wanting to be riskier than allowed by capital regulations (constrained banks) use regulatory arbitrage, while others do not. We find support for this hypothesis using trust-preferred securities issuance, a form of regulatory arbitrage available to almost all U.S. banks from 1996 to Dodd-Frank. We also find support for predictions that constrained banks are riskier, perform worse during the crisis, and use multiple forms of regulatory arbitrage. We show that neither too-big-to-fail incentives nor misaligned managerial incentives are first-order determinants of this type of regulatory arbitrage.

We investigate the determinants of sovereign bond holdings of German banks and the implications of such holdings for bank risk. We use granular information on all German banks and all sovereign debt exposures in the years 2005–2013. As regards the determinants of sovereign bond holdings of banks, we find that these are larger for weakly capitalized banks, banks that are active on capital markets, and for large banks. Yet, only around two thirds of all German banks hold sovereign bonds. Macroeconomic fundamentals were significant drivers of sovereign bond holdings only after the collapse of Lehman Brothers. With the outbreak of the sovereign debt crisis, German banks reallocated their portfolios toward sovereigns with lower debt ratios and bonds with lower yields. With regard to the implications for bank risk, we find that low-risk government bonds decreased the risk of German banks, especially for savings and cooperative banks. Holdings of high-risk government bonds, in turn, increased the risk of commercial banks during the sovereign debt crisis.

I examine whether corporate tax avoidance is associated with internal control weaknesses ( ICW s) disclosed under the Sarbanes‐Oxley Act ( SOX ). ICW s disclosed under SOX are frequently related to a firm's tax function. When pervasive ICW s exist, the likelihood increases that these frequent tax‐related ICW s spill over from financial reporting issues to tax avoidance objectives. Thus, my research helps corporate stakeholders understand the implications of internal controls beyond simply financial reporting objectives. Results indicate that, on average, firms with a tax‐related ICW have a 4 percent higher three‐year cash effective tax rate relative to firms without any such weaknesses. Further estimates reveal that this negative relation stems from pervasive, company‐level tax ICW s. Analysis of remediation suggests a causal link. I find that after remediating tax‐related ICW s, firms report higher levels of tax avoidance in the future. Broadly, these findings support that internal control quality represents a proxy for internal governance, and thus the strength of alignment between managers and shareholders. Furthermore, tax‐related internal controls represent an important underlying determinant of tax avoidance with significant cash flow effects, and implications beyond financial reporting.