Knowledge that Transforms

Abstract Under Title II of the Jumpstart Our Business Startups Act, firms can sell private placement securities to the public via general solicitation (GS) or privately (non-GS). We find that equity offerings under GS tend to be riskier than under non-GS. After accounting for selection, GS issuers are less likely to succeed in i) raising capital, ii) getting venture capital (VC) funding, and iii) exiting via IPO or mergers and acquisitions, and incur substantial brokerage costs for advertising and verifying investor accreditation. However, GS appears to help new entrants and offerings that use registered brokers. The success of Form D financing improves future VC financing and exit outcomes.

Abstract I ask whether hedgers who speculate should be regulated differently from other speculators in a model where information acquisition is endogenous, and information has real effects. Hedging benefits and feedback effects generate strategic complementarities between market-maker, firm manager, and trader, which causes multiple equilibria. Gains from trade are lower when hedgers acquire information, while speculators may produce less information than socially desirable. A “Volcker rule” separating hedging and speculative activities may help select the higher welfare equilibrium. When too little information is produced, contracts whereby a firm subsidizes losses of designated market-makers (DMM) to make prices more informative increase welfare.

Abstract Institutional investors conduct more governance research and are less likely to follow proxy advisor vote recommendations when a company’s bonds comprise a larger share of their assets. These findings are driven by bond holdings, shareholder proposals, and companies where fixed-income managers are more likely to be attentive and share an interest with equity investors in improving governance. The findings do not concentrate on companies or shareholder proposals where creditor–shareholder conflicts are likely. Overall, the findings suggest that corporate bond holdings influence how actively institutions monitor their equity positions and contribute to institutions’ overall incentive to be engaged stewards.

Abstract We introduce the implied value premium ( IVP ), the difference between the implied costs of capital of value and growth stocks, to predict time variation in the ex post value premium. During 1977–2023, IVP is the strongest predictor of the ex post value premium. It also predicts the investment premium, consistent with the Investment CAPM. However, IVP ’s ability to predict the difference in cumulative abnormal returns around quarterly earnings announcements of value and growth stocks suggests that mispricing may also play a role. Overall, our results suggest that recent value underperformance reflects cyclical variation rather than a permanent shift.

Abstract We propose and test a catering theory of earnings guidance. As predicted by our model, managers cater to reference point-dependent investor preferences by issuing excessively optimistic earnings forecasts if their investors have experienced poor stock returns. Moreover, earnings guidance is most biased when managers strongly discount future outcomes, when the stock’s payoff uncertainty is high, and when managers face low costs for issuing inaccurate forecasts. Catering via earnings guidance succeeds in moving stock market prices and induces mispricing which is partially corrected around the corresponding final earnings announcement.

Abstract We find that CEO compensation increases following acquisitions only in those deals in which acquirer stock is used as the method of payment. These compensation increases are driven by increases in equity-based compensation and are concentrated in riskier acquirers, in riskier acquisitions, and in acquirers whose CEOs have low exposure to the stock price. We find little support for traditional agency cost explanations of changes in CEO pay following acquisitions. However, our findings are broadly consistent with compensation changes representing a contracting solution to a two-sided adverse selection problem that is present only in stock acquisitions.

Abstract How do bankers treat green firms? Using unique loan application and banker preference data from a mid-sized bank, we find that customer managers, serving as front-line bankers, give more favorable recommendations to green firms, especially when they hold green values themselves. However, a minority of environmentally skeptical loan officers, aware through internal training that customer managers generally have greener preferences, counter this by downgrading positive evaluations of green firms. Despite not knowing the customer manager’s identity, these officers use their discretion to mitigate what they perceive as green biases, demonstrating the significant moderating role of superiors within the bank’s hierarchy.

Abstract Exploiting changes in countries’ competition laws, we find that competition increases firms’ propensity to use zero leverage (ZL). We test the financial-flexibility, financial-constraint, and quiet-life explanations for this result, concluding that desire for flexibility is the one most likely. The relation between competition and ZL strengthens with cash-flow volatility, which supports the flexibility motive. Adoption of ZL by firms is accompanied by increases in payouts, so it is unlikely that ZL adopters are constrained. Proxies for governance have no effect on the relation between competition and ZL, suggesting that desire for a quiet life is not the explanation either.

Abstract We study the information content of corporate insiders’ trades after earnings announcements. We find little evidence that insiders trade on foreknowledge of material information in the post-SOX period. Conditioning on short-selling activity as a proxy for demand of arbitrageurs who exploit short-term mispricing, we show that insiders profit from selling because of their ability to exploit short-term mispricing after earnings releases. In contrast before SOX, insiders do take advantage of foreknowledge of material information while selling. Insider purchases are based on foreknowledge of material information both before and after SOX, but they are rare and have small economic magnitude.

Abstract This article studies the importance of corporate boards through a learning model in which capital markets learn about incoming directors’ quality. The model’s predictions are tested across a large sample of director appointments. Estimates show that governance-related uncertainty accounts for about 10% of stock return volatility when a new director joins. The learning framework provides a theoretically grounded approach to identify when directors matter more to investors. The analysis shows that director importance varies with board composition and firm attributes: Investors perceive directors as more important on boards with greater generational diversity, in smaller firms, and firms with higher knowledge capital.