This study is the first to link managerial turnover to mutual fund managerial structure in a manner that indicates the strong presence of a conflict of interests between investors and fund sponsors in an area of fund governance where we have been led to believe there are strong and well-functioning mechanisms to guard against the exploitation of investors. I utilize the unique characteristics of mutual funds where managers sometimes manage multiple “firms” simultaneously, something not generally observed in industrial firms. I test the governance mechanisms using the mutual fund complexes management structure; unitary and multiple fund management (UFM and MFM). This study shows that UFMs tend to have higher asset growth rates and higher fees than MFMs, suggesting that sponsors can benefit more from keeping them intact. I find that changing managers under the UFM is more costly to sponsors making them more reluctant to fire poor performers. I document that underperforming UFM are −2.77% less likely to be replaced than their underperforming MFM counterparts. In addition, the conflict of interests affect the replacement decision, as high expense ratio fund managers have a lower probability of replacement for a given level of underperformance.

This paper investigates the relationship between a firm′s loan commitment demand and its overall capital structure. I develop a model which demonstrates that a loan commitment leads a firm to higher privately optimal debt level and a lower cost of debt funds; these results are driven by the loan commitment′s ability to attenuate the potential moral hazard problems attendant upon debt financing. I confront the predictions with cross-sectional data, and find that the availability of unused loan commitment financing is positively related to firm leverage and negatively related to cost of debt funds. Journal of Economic Literature Classification Numbers: D82, G21, G32.

Companies are sometimes accused of misleading the market. The SEC can punish this with enforcement actions. Alternatively, shareholders can seek redress through a shareholder class action (SCA). Thus, using a sample of 416 securities class actions, this paper shows that SCAs are a catalyst to promote disciplinary takeovers, CEO turnover and pay-cuts, and harm CEOs’ future job-prospects.

We examine the change in the value of the underlying stock associated with long-term option introduction. Analysis of the abnormal returns associated with LEAPS (Long-Term Equity Anticipation Security) introductions indicates a decline in firm value even after we control for the endogenous nature of the listing decision. However, the evidence does not support previously-offered explanations for the price change associated with option introductions. In particular, we do not find the predicted relations between the cumulative abnormal returns and variables associated with loosening of short sale constraints such as beta, proxies for the dispersion in investor beliefs, and change in relative short interest.

This paper tries to explain why the issuers of an asset would restrict what information is available about their asset. In a world where knowledge is valued, market forces should induce disclosure, but we often see markets (such as the market for mortgage-backed securities) where assets' issuers refuse to release valuable information. We present a model of market liquidity and find that market liquidity can both rise and fall with the quantity of released information. More information may increase asymmetries of information and “lemons” style breakdowns. We find that asset bundling is more advantageous when private information is more accurate, which may be the case in the mortgage-backed securities market.Journal of Economic LiteratureClassification Numbers: G14, G32.

Using a multi-period partial equilibrium model, I demonstrate that a combination of management fees and a time-varying information advantage for a fund manager can account for several empirically observed characteristics of closed-end funds simultaneously. The model is consistent with the basic time-series behavior of fund discounts, accounts for the excess volatility of fund returns, explains why the management fee appears to be an insignificant determinant of discounts, and is consistent with many time-series correlations between discounts, NAV returns, and fund returns. The model also generates novel predictions regarding the relations between asset turnover, discounts, and returns.

This article examines the effect of asymmetric information on the trading of underwriting risk between insurers and reinsurers and how it is mitigated in a context of long-term relationships. It begins by explaining how information problems affect the efficiency of the allocation of risk between insurers and reinsurers and how long-term implicit contracts allow the inclusion of new information in the pricing of reinsurance coverage. A key feature of these relationships is the reliance on loss-contingent rebates and commissions in the pricing of reinsurance coverage. We argue that when information is revealed only over time, long-term implicit contracts between insurers and reinsurers allow the inclusion of new information into reinsurance pricing. Because of this feature, the allocation of risk between insurers and reinsurers is more efficient. Specifically, such arrangements lead to more reinsurance coverage, higher insurer profits, and lower expected distress in the industry. Journal of Economic Literature Classification Numbers: G22, G13, L15, D81.

In this paper, we examine whether the structure of the chief executive officer’s (CEO) compensation package can explain default risk and performance in bank holding companies (BHCs) during the recent credit crisis. Using a sample of 371 BHCs, we show that in 2006 higher holdings of inside debt relative to inside equity by a CEO after controlling for firm leverage is associated with lower default risk and better performance during the crisis period. We present evidence that before the crisis banks with higher inside debt ratios also have supervisory ratings that indicate stronger capital positions, better management, stronger earnings, and being in a better position to withstand market shocks in the future. Such ex-ante evidence can explain the observed relationship between inside debt, default risk, and performance during the crisis.

After a large bank merger, the compensation of the surviving bank's CEO often increases materially. Theories of executive compensation based on managerial productivity and optimal incentives suggest that changes in CEO compensation are related to the potential gains from merger. Alternatively, compensation gains might result from an increase in bank size regardless of whether the merger creates value. We examine mergers among billion-dollar banks in the 1990s and find results consistent with managerial productivity. Specifically, we show empirically that changes in CEO compensation after mergers are positively related to anticipated gains from merger measured at the announcement date. Other changes in the structure of compensation are also consistent with hypotheses based on managerial productivity and incentive restructuring.

This paper extends the standard single-period model of deposit insurance to a mutliperiod setting. It incorporates a variety of features describing bank and regulator behavior, such as endogenous capital adjustments and regulatory forbearance. Budgetary costs of deposit insurance are found using contingent claims techniques. We show how the market value of a bank′s net worth, a critical input of the model, can be estimated using accounting cash flow data and information from aggregate bank stock prices. Using Call Report data on U.S. commercial banks, we provide empirical estimates of the aggregate cost of deposit insurance under alternative regulatory policies. Journal of Economic Literature Classification Numbers: G13, G21, G28, H61.