ABSTRACT Constantinides (1986) documents how the impact of transaction costs on per‐annum liquidity premia in the standard dynamic allocation problem with i.i.d. returns is an order of magnitude smaller than the cost rate itself. Recent papers form portfolios sorted on liquidity measures and find spreads in expected per‐annum return that are the same order of magnitude as the transaction cost spread. When we allow returns to be predictable and introduce wealth shocks calibrated to labor income, transaction costs are able to produce per‐annum liquidity premia that are the same order of magnitude as the transaction cost spread.

ABSTRACT Agency theory and optimal contracting theory posit opposing roles and shareholder wealth effects for corporate inside directors. We evaluate these theories using the market for outside directorships to differentiate among inside directors. Firms with inside directors holding outside directorships have better operating performance and market‐to‐book ratios, especially when monitoring is more difficult. These firms make better acquisition decisions, have greater cash holdings, and overstate earnings less often. Announcements of outside board appointments improve shareholder wealth, while departure announcements reduce it, consistent with these inside directors improving board performance and outside directorships being an important source of inside director incentives.