Traditional finance theories typically treat leases and debt as substitutes. However, the empirical findings on the relation between leases and debt are mixed. This paper reinvestigates this relation. I present a model to incorporate different theories on the substitutability and complementarity between leases and debt, and I test the model implications empirically in a GMM framework that simultaneously controls for endogeneity problems and firms' fixed effects. The findings suggest that leases and debt are substitutes instead of complements. I also investigate the variation in the substitutability between leases and debt, and find that in those firms with more growth options or larger marginal tax rates, or in those firms paying no dividends, the substitutability is more pronounced, i.e., the cost of new debt increases to a larger degree with extra leases.

Using stock transactions data along with detailed stockholdings for a comprehensive sample of U.S. actively managed equity mutual funds from 1993 to 2002, this paper empirically examines the effect of liquidity and investment style on the relation between fund size and fund performance. Consistent with Chen, Hong, Huang, and Kubik (2004), I find a significant inverse relation between fund size and fund performance. Further, this inverse relation is stronger among funds that hold less liquid portfolios. The inverse relation between fund size and fund performance is also more pronounced among growth and high turnover funds that tend to have high demands for immediacy. Overall, this paper's findings suggest that liquidity is an important reason why fund size erodes performance.

In portfolio risk minimization, the inverse covariance matrix prescribes the hedge trades in which a stock is hedged by all the other stocks in the portfolio. In practice with finite samples, however, multicollinearity makes the hedge trades too unstable and unreliable. By shrinking trade sizes and reducing the number of stocks in each hedge trade, we propose a “sparse” estimator of the inverse covariance matrix. Comparing favorably with other methods (equal weighting, shrunk covariance matrix, industry factor model, nonnegativity constraints), a portfolio formed on the proposed estimator achieves significant out-of-sample risk reduction and improves certainty equivalent returns after transaction costs.

This paper provides the first theoretical explanation and the first empirical analysis of contingent value rights (CVRs), which have been used as a means of payment in acquisitions, exchange offers, debt restructurings, Chapter 11 reorganizations, and lawsuit settlements. A CVR is a put option committing to pay additional cash or securities to CVR holders, contingent on the issuer's share price falling below a prespecified reference level. In this paper, we develop a model to show that CVRs can help a higher-intrinsic-value firm to reveal its firm type when the firm faces an asymmetric information problem. Our model predicts that i) when CVRs are offered along with cash or stock, the announcement period abnormal stock return is greater than that in stock offers, ii) firms facing more severe asymmetric information problems are more likely to offer CVRs to signal their firm type, and iii) firms that are relatively more cash-constrained are more likely to offer CVRs rather than cash. We test all three predictions using a sample of mergers and acquisitions. Our empirical results are consistent with the predictions of the model.

Using a comprehensive sample of U.S. mutual funds from 1992 to 2004, we find strong evidence that investment bank-affiliated funds underperform unaffiliated funds. Consistent with the conflict of interest hypothesis, we find that affiliated funds hold disproportionately large amounts of stocks of their initial public offering and seasoned equity offering clients. Moreover, worse-performing clients are more likely to be held by affiliated funds. Our results are robust to alternative risk adjustments, portfolio weighting schemes, and regression methodologies. Overall, our findings are consistent with the idea that investment banks use affiliated funds to support underwriting business at the expense of fund shareholders.

We show that contractual risk-taking incentives for chief executive officers (CEOs) increased at large U.S. commercial banks around 2000, when industry deregulation expanded these banks’ growth opportunities. Our econometric models indicate that CEOs responded positively to these incentives, especially at the larger banks best able to take advantage of these opportunities. Our results also suggest that bank boards responded to higher-than-average levels of risk by moderating CEO risk-taking incentives; however, this feedback effect is absent at the very largest banks with strong growth opportunities and a history of highly aggressive risk-taking incentives.

An abundance of evidence relates facial width-to-height ratio (fWHR) to masculine behaviors in males. We show that hedge funds operated by high-fWHR managers underperform those operated by low-fWHR managers, bear greater downside risk, are more susceptible to fire sales, and fail more often. High-fWHR managers compensate for their underperformance by marketing their funds more aggressively, thereby garnering higher flows and fee revenues. By exploiting major personal events that shape testosterone, namely marriage and fatherhood, we trace the biological mechanism underlying the relation between fWHR and investment performance to circulating testosterone. Our findings are robust and extend to equity mutual funds.

After medical marijuana legalization (MML) by U.S. states, firms’ cost of equity (COE) decreases, especially for those with more growth opportunities, higher productivity, or a more skilled workforce. This policy change also reduces firm risk and leads to an increase in labor supply through increased labor force participation, employment, hours worked, and net migration. Further, home prices rise after MML, reflecting increased local housing demand due to a growing supply of workers. These findings align with theoretical models that link asset prices to labor markets and suggest that MML can lower firms’ COE by mitigating labor search frictions.

We examine the ability of three groups of informed market participants to anticipate the 2007–2008 financial crisis. Institutional investors and financial analysts exhibit some awareness of the impending crisis in their preference for nonfinancial stocks over financial stocks. In contrast, corporate insiders of financial firms appear to be completely unaware of the timing and extent of the financial crisis. Net purchases by managers of financial firms exceed those by managers of nonfinancial firms over the entire 2006–2008 period. Our results add considerable weight to the argument that the financial crisis was more a case of flawed judgment than flawed incentives.

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.