We investigate share price responses to the formation of 345 strategic alliances spanning 1983–1992. The average stock price response is positive, with no evidence of wealth transfers. This is true for horizontal alliances (involving partner firms in industries with the same three-digit SIC codes) as well as non-horizontal alliances. For horizontal alliances, more value accrues when the alliance involves the transfer or pooling of technical knowledge than with nontechnical alliances. Finally, partnering firms tend to display better operating performance than their industry peers over the five-year period surrounding the year in which an alliance is formed.

We examine the rationality of investor exercise behavior by analyzing two years' tendered exercise notices for Treasury bond futures options. We conclude that exercise behavior is generally rational, but document numerous failures to exercise as well as some exercises that should not have occured, both at and prior to expiration. The most frequent type of error is failing to exercise, suggesting that traders do not monitor their positions with sufficient care. Finally, we show that investors use information arriving after trading closes, but before exchange-imposed exercise deadlines, in forming their exercise decisions.

A higher frequency of positive overnight returns followed by negative trading day reversals during a month suggests a more intense daily tug of war between opposing investor clienteles, who are likely composed of noise traders overnight and arbitrageurs during the day. We show that a more intense daily tug of war predicts higher future returns in the cross section. Additional tests support the conclusion that, in a more intense tug of war, daytime arbitrageurs are more likely to discount the possibility that positive news arrives overnight and thus overcorrect the persistent upward overnight price pressure.

On October 26, 2008, Porsche announced a largely unexpected domination plan for Volkswagen. The resulting short squeeze in Volkswagen’s stock briefly made it the most valuable listed company in the world. We argue that this was a manipulation designed to save Porsche from insolvency and the German laws against this kind of abuse were not effectively enforced. Using hand-collected data we provide the first rigorous academic study of the Porsche-VW squeeze and show that it significantly impeded market efficiency. Preventing manipulation is important because without efficient securities markets, the EU’s major project of the Capital Markets Union cannot be successful.

After decades of de-prioritizing shareholders’ economic interests and low corporate profitability, Japan introduced the JPX-Nikkei400 in 2014. The index highlighted the country’s “best-run” companies by annually selecting the 400 most profitable of its large and liquid firms. We find that managers competed for inclusion in the index by significantly increasing return on equity (ROE), and they did so at least in part due to their reputational or status concerns. The ROE increase was predominantly driven by improvements in margins, which were in turn partially driven by cutting research and development (R&D) intensity. Our findings suggest that indexes can affect managerial behavior through reputational or status incentives.

This study evaluates the relation between hostile takeovers and 17 takeover laws from 1965 to 2014. Using a data set of largely exogenous legal changes, we find that certain takeover laws, such as poison pill and business combination laws, have no discernible impact on hostile activity, while others such as fair price laws have reduced hostile takeovers. We construct a Takeover Index from the laws and find that higher takeover protection is associated with lower firm value, consistent with entrenchment and agency costs. However, conditional on a bid, firms with more protection achieve higher premiums, consistent with increased bargaining power.

We analyze a reduced-form framework for understanding the equity loan market's impact on share prices. We show that hard-to-borrow stocks will have distinct return patterns, responding more to shocks in the supply of shares available, and to changes in the heterogeneity of investor beliefs, than other stocks. We conduct two empirical tests in which we find strong support for these equilibrium predictions. In our first test, we take advantage of a tax-driven exogenous shock to share loan supply and find that when supply is reduced around dividend record dates, prices of hard-to-borrow stocks increase 1.1% while prices of easy-to-borrow stocks are unaffected. In our second test, we find that hard-to-borrow stocks have 4.8% lower three-month returns than other stocks, with negative returns concentrated in stocks with high heterogeneity in investor beliefs. Thus, we extend the Diether, Malloy, and Scherbina (2002) result that stocks with a greater dispersion of investor beliefs have lower returns.

Proxy advisory and corporate governance rating firms (such as RiskMetrics/Institutional Shareholder Services, GovernanceMetrics International, and The Corporate Library) play an increasingly important role in U.S. public markets. They rank the quality of firm corporate governance, advise shareholders how to vote, and sometimes press for governance changes. We examine whether commercially available corporate governance rankings provide useful information for shareholders. Our results suggest that they do not. Commercial ratings do not predict governance-related outcomes with the precision or strength necessary to support the bold claims made by most of these firms. Moreover, we find little or no relation between the governance ratings provided by RiskMetrics with either their voting recommendations or the actual votes by shareholders on proxy proposals.

We track the fortunes of all 2,206 individuals identified as responsible parties for all 788 Securities and Exchange Commission (SEC) and Department of Justice (DOJ) enforcement actions for financial misrepresentation from January 1, 1978 through September 30, 2006. Fully 93% lose their jobs by the end of the regulatory enforcement period. Most are explicitly fired. The likelihood of ouster increases with the cost of the misconduct to shareholders and the quality of the firm's governance. Culpable managers also bear substantial financial losses through restrictions on their future employment, their shareholdings in the firm, and SEC fines. A sizeable minority (28%) face criminal charges and penalties, including jail sentences that average 4.3 years. These results indicate that the individual perpetrators of financial misconduct face significant disciplinary action.

Traditional studies fail to find conclusive evidence that bank mergers create value. We analyze a sample of the largest bank mergers between 1985 and 1996. For a subset of this sample, we obtain management estimates of projected cost savings and revenue enhancements. We find that recent mergers appear to result in positive revaluations of the combined value of bidder and target stocks. Although not as large as the present value of management's estimates, with the bulk of the revaluation being attributable to estimated cost savings rather than projected revenue enhancements.