We examine the impact of the Global Settlement on affiliation bias in analyst recommendations. Using a broad measure of investment bank-firm relationships, we find a substantial reduction in analyst affiliation bias following the settlement for sanctioned banks. In contrast, we find strong evidence of bias both before and after the settlement for affiliated analysts at non-sanctioned banks. Our results suggest that the settlement led to an increase in the expected costs of issuing biased coverage at sanctioned banks, while concurrent self-regulatory organization rule changes were largely ineffective at reducing the influence of investment banking on analyst research at large non-sanctioned banks.

The neoclassical theory of investment has mainly been tested with physical investment, but we show that it also helps explain intangible investment. At the firm level, Tobin’s q explains physical and intangible investment roughly equally well, and it explains total investment even better. Compared with physical capital, intangible capital adjusts more slowly to changes in investment opportunities. The classic q theory performs better in firms and years with more intangible capital: Total and even physical investment are better explained by Tobin’s q and are less sensitive to cash flow. At the macro level, Tobin’s q explains intangible investment many times better than physical investment. We propose a simple, new Tobin’s q proxy that accounts for intangible capital, and we show that it is a superior proxy for both physical and intangible investment opportunities.

The equity premium — the expected return on the aggregate stock market less the government bill rate – is of central importance to the portfolio allocation of individuals, to the investment decisions of firms, and to model calibration and testing. This quantity is usually estimated from the sample average excess return. We propose an alternative estimator, based on maximum likelihood, that takes into account information contained in dividends and prices. Applied to the postwar sample, our method leads to an economically significant reduction from 6.4% to 5.1%. Simulation results show that our method produces more reliable estimates under a wide range of specifications.

We explore how asymmetric information in financial markets affects outcomes in product markets. Difference-in-difference tests around brokerage house merger/closure events (which increase asymmetric information through reductions in analyst coverage) indicate worse industry-adjusted sales growth for shocked firms than for their peers. Our results are consistent with Bolton and Scharfstein's (1990) tradeoff between investor agency concerns and predation risk. Further support is found in stronger treatment effects among firms with ex ante greater agency concerns, financing constraints, asymmetric information, and those operating in ex ante more competitive (fluid) product market spaces. Our results are concentrated in industries where we can clearly identify either net firm entry or exit.

This paper challenges the view that foreign investors lead firms to adopt a short-term orientation and forgo long-term investment. Using a comprehensive sample of publicly listed firms in 30 countries over the period 2001–2010, we find instead that greater foreign institutional ownership fosters long-term investment in tangible, intangible, and human capital. Foreign institutional ownership also leads to significant increases in innovation output. We identify these effects by exploiting the exogenous variation in foreign institutional ownership that follows the addition of a stock to the MSCI indexes. Our results suggest that foreign institutions exert a disciplinary role on entrenched corporate insiders worldwide.