In this article, we provide evidence concerning the extent to which managers are to blame when their firms become bankrupt. We study a sample of firms that file for Chapter 11 and determine the actions taken by the firms' managers during the three‐year period before the filing. We compare the sample with a control sample of firms that performed better. We suggest that the comparison provides evidence on the way managers act as their firms sink into financial trouble and whether financial distress is the result of incompetence or excessively self‐serving managerial decisions or due to factors outside of management's control. We find that managers of the Chapter 11 firms and the control firms make very similar decisions and that, on average, neither set of managers is perceived to be taking value‐reducing actions. These results do not change when we control for managerial turnover or managerial ownership. We also find that when managers are replaced in firms that eventually file for Chapter 11 protection, the market does not respond positively, regardless of whether the new managers are from inside or outside the firm. Our findings suggest that when managers are blamed for financial distress, they are serving as scapegoats.

In this paper, we provide evidence concerning the extent to which managers are to blame when their firms become bankrupt. We study a sample of firms that end up in severe financial distress to determine the actions taken by firms' managers as their financial positions worsen. We compare the sample of firms that eventually experience server financial distress (fling for Chapter 11 bankruptcy protection) with a control sample of firms that performed better. We suggest that the comparison provides evidence on the way managers act as their firms sink into financial trouble and the extent to which financial distress is the result of incompetence or excessively self-serving managerial decisions or due to factors outside of management's control. We find that managers of Chapter 11 firms and the control forms make very similar decisions and that, on average, neither set of managers are perceived to be taking value- reducing actions. We also find that when managers are replaced in the firms that eventually file for Chapter 11 protection, the market does not respond positively. These findings support the idea that financial distress is due to conditions outside of the control of managers or that the managers are serving as scapegoats.

In a broad-based democracy, not all contracts will survive. Even some efficient contracts will be banned, if enough people dislike them. Thus if the average voter dislikes powerful private financial institutions, politics will, all else being equal, ban them. Interest groups cancel one another out. One group wants powerful financial institutions and another, such as small-town bankers, does not. The small-town bankers have a leg up in the political infighting, because popular opinion is on their side, leading to a ban on some arrangements that a less regulated economy might produce. Or, to recast the problem in agency cost terms, managers would like to be free from the oversight that powerful financial intermediaries might provide, and in the modern era, politicians might side with managers when the managers’ goals of thwarting takeovers align with a public wary of too many hostile takeovers. The politician can satisfy the managerial interest group and be popular at the same time. Agency costs move into the political arena; some contracts are banned, and whether the substitutes that arise are always perfect ones, without additional costs, is an open question. Law restricted the dominant financial institutions from the end of the nineteenth century onward. American banks were fragmented geographically, lacking the size to take big slices of capital of the large American firms emerging at the end of the nineteenth century. Banks’ products and portfolios have been further restricted: they were barred from the securities business and from owning stock. Their affiliates were also restricted in the stock they could own. Insurers could not buy stock for most of this century. Mutual funds cannot easily devote their portfolios to big blocks and face legal problems if they go into the boardroom. Pensions cannot take very big blocks without legal and structural problems; the big private pensions are under managerial control, not the other way around. These rule were neither random nor economically inevitable. While public interest goals of keeping financial intermediaries prudent and stable explain some of the rules, they do not explain all of them. Two dominant themes lay behind many of the rules: American public opinion, which mistrusted private large accumulations of power, and interest group politics. There were winners in fragmenting financial institutions. These winners had a large voice in Congress, and their goals matched public opinion. For example, small banks wanted to shackle large ones and succeeded in getting and keeping branching limits, banks on banks in the securities business, banks on bank affiliates’ moving outside of banking, and deposit insurance (which, by guaranteeing depositors that they will be paid if the bank fails, helps smaller, weaker banks more than it helps more solid, often bigger banks). These features of the political economy of American finance became foundational for corporate finance and the separation of ownership from control.

The authors investigate the conditional covariances of stock returns using bivariate exponential ARCH models. These models allow market volatility, portfolio-specific volatility, and beta to respond asymmetrically to positive and negative market and portfolio returns, i.e., 'leverage' effects. Using monthly data, the authors find strong evidence of conditional heteroscedasticity in both market and nonmarket components of returns, and weaker evidence of time-varying conditional betas. Surprisingly, while leverage effects appear strong in the market component of volatility, they are absent in conditional betas and weak and/or inconsistent in nonmarket sources of risk.

We investigate the conditional covariances of stock returns using bivariate exponential ARCH (EGARCH) models. These models allow market volatility, portfolio-specific volatility, and beta to respond asymmetrically to positive and negative market and portfolio returns, i.e., “leverage” effects. Using monthly data, we find strong evidence of conditional heteroskedasticity in both market and non-market components of returns, and weaker evidence of time-varying conditional betas. Surprisingly while leverage effects appear strong in the market component of volatility, they are absent in conditional betas and weak and/or inconsistent in nonmarket sources of risk.

We investigate the conditional covariances of stock returns using bivariate exponential ARCH (EGARCH) models. These models allow market volatility, portfolio‐specific volatility, and beta to respond asymmetrically to positive and negative market and portfolio returns, i.e., “leverage” effects. Using monthly data, we find strong evidence of conditional heteroskedasticity in both market and non‐market components of returns, and weaker evidence of time‐varying conditional betas. Surprisingly while leverage effects appear strong in the market component of volatility, they are absent in conditional betas and weak and/or inconsistent in nonmarket sources of risk.