ABSTRACT This paper examines the economic impact of the Sarbanes-Oxley Act (SOX) by studying foreign firms? choice of whether to issue bonds in the U.S. public bond market or elsewhere before and after the law's enactment in 2002. After controlling for firm characteristics, bond features, home-country attributes, and market conditions, I find that foreign firms rely less on the U.S. public bond market after SOX. Additionally, some determinants of choosing the U.S. public bond market have changed since the passage of SOX: firms listing equities on U.S. stock exchanges, adopting International Financial Reporting Standards (IFRS), and doing large bond issuances are more likely to choose this market in the post-SOX period than in the pre-SOX period. Overall, these results are consistent with a shift in the expected costs and benefits of choosing the U.S. public bond market following SOX. This paper provides the first evidence about how SOX influences debt financing decisions and alters capital flows across international bond markets.

We introduce uncertainty into Holmstrom and Milgrom (1987) to study optimal long-term contracting with learning. In a dynamic relationship, the agent's shirking not only reduces current performance, but also increases the agent's information rent due to the persistent belief manipulation effect. We characterize the optimal contract using the dynamic programming technique in which information rent is the unique state variable. In the optimal contract, the optimal effort is front-loaded and stochastically decreases over time. Furthermore, the optimal contract exhibits an option-like feature in that incentives increase after good performance. Implications about managerial incentives and asset management compensations are discussed.

ABSTRACT We investigate whether hedge funds (HFs) undertake activism in the corporate bond market. Although there is a growing empirical literature investigating HF activism in the equity market, we know little about the role of HF activists in the corporate bond market. The empirical setting is the active enforcement of bondholders' rights during 2003–2007, triggered by issuers' violation of a standard bond covenant requiring timely financial reporting. Using HF holding data of convertible bonds in Form 13F filings, we identify HF interventions. The patterns of HF ownership suggest that HFs actively purchased convertible bonds to increase their ownership before the issuance of default notices. Relative to other interventions, HF interventions are more likely to target companies with higher levels of cash holdings but less likely to target companies with a greater amount of private debt outstanding. Furthermore, we find that HF interventions are associated with elevated bond trading frequency before late filing notifications and issuances of default notices, as well as a wealth transfer from stockholders and non‐intervening bondholders to intervening bondholders. Taken together, the empirical evidence demonstrates that HFs take actions to force the issuance of default notices in response to delay in financial reporting, suggesting that the primary objective of HF activism in this setting is to extract short‐term profit from bond issuers.

We present new evidence on debt covenant violation ( DCV ) consequences that have not previously been examined in the literature. In particular, we show that a DCV triggers significant information asymmetry and uncertainty on the part of shareholders and auditors as reflected in higher bid–ask spreads, return volatility, and audit fees. Further, these consequences occur even when lender‐imposed costs are relatively lower, consistent with the act of default itself triggering shareholder and auditor uncertainty. The results highlight costs to the firm of having bright‐line rules in contracts, and add to an understanding of the consequences of DCV s.

We examine stock and bond market reactions to the key events leading to the passage of the Dodd–Frank Act to assess the markets’ expectations about the effectiveness of the Act on systemically important financial firms. Using small/medium sized domestic financial institutions as a control group, we find that large financial institutions overall had negative abnormal stock returns and positive abnormal bond returns, suggesting that the markets expect the Act to be effective in reducing these banks’ risk-taking. We further investigate the market reactions for (1) larger and more interconnected financial institutions; and (2) the Big 6 banks to evaluate the markets’ assessment about the effectiveness of the act in ending the too-big-to-fail policy. We document that larger and more interconnected financial institutions experienced more negative abnormal stock returns and more positive abnormal bond returns as compared to other banks in our sample, but these relations are not present during the final phase of the passage. Likewise, we find that both shareholders and bondholders of the Big 6 banks initially experienced significant negative returns, followed by insignificant returns during the final phase of the passage. These results appear to suggest the markets are doubtful about the effectiveness of the final version of the bill to end the too-big-to-fail status in particular for the Big 6 banks.

We introduce uncertainty into Holmstrom and Milgrom (1987) to study optimal long-term contracting with learning. In a dynamic relationship, the agent’s shirking not only reduces current performance, but also increases the agent’s information rent due to the persistent belief manipulation effect. We characterize the optimal contract using the dynamic programming technique in which information rent is the unique state variable. In the optimal contract, the optimal effort is front-loaded and stochastically decreases over time. Furthermore, the optimal contract exhibits an option-like feature in that incentives increase after good performance. Implications about managerial incentives and asset management compensations are discussed. Received August 31, 2015; editorial decision October 20, 2016 by Editor Francesca Cornelli.

We introduce a new method to measure the temporal discounting of money. Unlike preceding methods, our method requires neither knowledge nor measurement of utility. It is easier to implement, clearer to subjects, and requires fewer measurements than existing methods. (JEL C91, D11, D12, D91)