Using a large sample of accounting data for non-financial companies in France, this paper studies the interactions between macroeconomic shocks and companies’ financial fragility. We consider links in both directions, namely whether firms’ bankruptcies are affected by macroeconomic variables, and whether bankruptcies determine the business cycle. We estimate forecasting equations for firms’ bankruptcy using Shumway's (2001) approach and study the joint dynamics of bankruptcies and macroeconomic variables within an exogenous VAR type model estimated at the sector level. We find evidence of reciprocal links between the bankruptcy rate and the output gap and highlight significant “second round effects” of shocks to the output gap on bankruptcies. We show how taking into account the dynamic transmission of macroeconomic shocks matters in stress testing exercises.

We employ a new data set comprised of disaggregate figures on clearing house loan certificate issues in New York City to document how the dominant national banks were crucial providers of temporary liquidity during the Panic of 1907. Clearing house loan certificates were extensions of credit by the New York Clearing House to its members. These certificates were transferable to other clearing house members as a form of final payment for settlement of interbank payments. The certificate issues allowed borrowing banks to maintain (and increase) loans, fulfill cash payment upon depositor withdrawal demands, and enabled gold imports, which took two to three weeks to arrive. The large, New York City national banks acted as private liquidity providers by requesting (and the New York Clearing House issuing) a volume of clearing house loan certificates in excess of their own immediate liquidity needs, in accord with their role as central reserve city banks in the national banking system.

The recent financial crisis has generated many distinct perspectives from various quarters. In this article, I review a diverse set of twenty-one books on the crisis, eleven written by academics, and ten written by journalists and one former Treasury Secretary. No single narrative emerges from this broad and often contradictory collection of interpretations, but the sheer variety of conclusions is informative, and underscores the desperate need for the economics profession to establish a single set of facts from which more accurate inferences and narratives can be constructed. (JEL E32, E44, E52, G01, G21, G28)

We examine how asset structure is related to leverage in different institutional environments, using tens of thousands of firm-level observations from small, privately held, emerging market firms that are likely to face financing constraints. Our empirical analysis indicates that the linkage between asset tangibility (fixed assets as a portion of total assets) and leverage (measured as long-term debt over total assets) varies, such that in countries with fewer restrictions on collateral (land transferability), the relationship between these variables is much tighter. This also applies to the linkage between tangibility and debt maturity structure (measured as long-term debt over total debt). We find no evidence that industry concentration in different countries or changing composition of firms over time is driving our findings. The results are robust to using firm-level fixed effects specifications, to clustering error terms at the country level, and to using an alternative proxy for collateral law regime.

[We solve for a firm's optimal cash holding policy within a continuous time, contingent claims framework using dividends, short-term borrowing, and equity issues as controls assuming mean reversion of earnings. Optimal cash is non-monotone in business conditions and increasing in the level of long-term debt. The model matches closely a wide range of empirical benchmarks and predicts cash and leverage dynamics in line with the empirical literature. Firm value is quite insensitive to changes in the level of long-term debt. The model has interesting implications for asset substitution, hedging, and pecking order. Growth opportunities do not greatly affect cash holding policy.]

[Mutual funds whose managers are in the same educational network as the firm's CEO are more likely to vote against shareholder-initiated proposals to limit executive compensation than out-of-network funds are. This voting propensity is stronger when voting among the funds in a family is not unanimous. Furthermore, CEOs of firms who have relatively high levels of educationally connected mutual fund ownership have higher levels of compensation than their unconnected counterparts. This aspect of executive compensation is related to both the abnormal trading performance of the connected investors in the firm and the perceived quality of firm management by the connected investors.]

[Using institutional investor demand as a proxy for revisions in sophisticated investors' expectations, we test whether financial strength information is gradually impounded over time. Consistent with the gradual incorporation of information, financial strength predicts both future returns and future institutional investor demand. Further consistent with the gradual incorporation of information, more sophisticated transient (high-turnover) institutions respond to financial strength signals prior to less sophisticated, nontransient institutions. A number of additional tests suggest that financial strength forecasts stock returns, at least in part, because it forecasts institutional demand, and institutional demand drives prices.]

Using a sample of restatement firms and a meet-or-beat model to classify firms as making discretionary accounting choices for opportunistic meet-or-beat (OP-MB) reasons, we show that originally reported earnings and accrual components are less predictive of future cash flows relative to the restated numbers. We find the opposite is true for firms classified as making discretionary accounting choices for non-OP-MB reasons. We consider a number of competing explanations for these latter results. Our findings are most consistent with the informational hypothesis, weakly consistent with conservative-motivated efficient contracting hypotheses, but inconsistent with opportunistic contracting and misapplication/errors of GAAP explanations.

We examine the benefits and costs associated with foreign independent directors (FIDs) at U.S. corporations. We find that firms with FIDs make better cross-border acquisitions when the targets are from the home regions of FIDs. However, FIDs also display poor board meeting attendance records and are associated with a greater likelihood of intentional financial misreporting, higher CEO compensation, and a lower sensitivity of CEO turnover to performance. Finally, firms with FIDs exhibit significantly poorer performance, especially as their business presence in the FID's home region becomes less important.