Using exogenous shocks on the ability to issue seasoned equity offerings (SEOs), we show SEOs lead to a higher employee skill composition, that is, a lower (higher) proportion of low (high) skilled workers. The decrease in low-skilled workers exceeds the increase in high-skilled workers, resulting in reduced employment at the firm level. These effects are more significant when firms invest more in technology following SEOs and face greater financial constraints before SEOs, suggesting that SEOs relieve budget constraints on technology investments. These findings demonstrate that while external equity financing helps upgrade technology to improve productivity, it has a dark side for low-skilled workers.

Can shareholders’ divestitures and threats of exit trigger improvements in firms’ environmental and social (E&S) policies? We show that E&S incidents are followed by some, but relatively small, divestitures. Nevertheless, following E&S incidents, firms with a one-standard-deviation higher E&S-conscious institutional ownership decrease their greenhouse gas emissions by 36.5% and improve their E&S scores by 7.2% more than other firms if their managers receive equity compensation. We do not observe any improvements associated with sales in E&S-conscious countries. Our results suggest that the threats of future exits and divestitures can improve E&S policies if shareholders are E&S-conscious and managers’ compensation is linked to the stock price.

Using holdings data on a representative sample of all Shanghai Stock Exchange investors, we show that increases in ownership breadth (the fraction of market participants who own a stock) predict low returns: highest change quintile stocks underperform lowest quintile stocks by 23% per year. Small retail investors drive this result. Retail ownership breadth increases appear to be correlated with overpricing. Among institutional investors, however, the opposite holds: stocks in the top decile of wealth-weighted institutional breadth change outperform the bottom decile by 8% per year, consistent with prior work that interprets breadth as a measure of short-sales constraints.

We test the limits of arbitrage argument for the survival of irrationality-induced financial anomalies by sorting securities on their individual residual variability as a proxy for idiosyncratic risk – a commonly asserted limit to arbitrage – and comparing the strength of anomalous returns in low versus high residual variability portfolios. We find no support for the limits of arbitrage argument to explain undervaluation anomalies (small value stocks, value stocks generally, recent winners, and positive earnings surprises) but strong support for the limits of arbitrage argument to explain overvaluation anomalies (small growth stocks, growth stocks generally, recent losers, and negative earnings surprises). Other tests also fail to support the limits of arbitrage argument for the survival of overvaluation anomalies and suggest that at least some of the factor premiums for size, book-to-market, and momentum are unrelated to irrationality protected by limits to arbitrage.

Dollar Cost Averaging is a strategy for purchasing equity securities that is widely recommended by professional investment advisors and commentators, but which has been virtually ignored by academic theorists and textbook writers. In this paper we explore whether the strategy is but another instance of irrational behavior by individual investors, or whether it is an investment heuristic that has survival value in an environment in which security prices exhibit mean reversion behavior that has only belatedly been recognized by academic theorists. Our evidence supports the view that the uninformed individual investors who follow this strategy in purchasing individual stocks to add to an existing portfolio are better off than if they followed the ‘rational’ strategies traditionally recommended by academics.

This article studies how the three-way interaction among shareholders, creditors, and managers shapes firms’ executive compensation. Firms with a higher ownership share by “dual holders”—institutional investors that simultaneously hold equity and bond of the company—adopt a less risk-inducing compensation structure: less stock options and more inside debt. Exploiting financial institution mergers that increase or decrease dual ownership for portfolio companies, we identify a causal link between dual ownership and CEO compensation policies. Mutual fund proxy voting data suggest that shareholder voting is an important channel for dual holders to implement less convex contracts.

Using national elections as sources of exogenous variation in uncertainty, we show that political uncertainty affects the volume and outcome of cross-border acquisitions. When a country is about to hold a national election, this deters foreign firms’ inbound acquisitions, especially when the host country poses greater expropriation risk. An upcoming home country election encourages firms to conduct outbound cross-border acquisitions, especially to target countries with free-trade agreements, military allies, or countries with better governance. At transaction level, we show that announcement returns to cross-border deals incorporate political uncertainty considerations. Overall, these results shed light on the effects of political uncertainty through the cross-border acquisition channel.

This article explores the relationship between a firm’s legal contracting environment and its innovation incentives. Using granular data from the pharmaceutical industry, we examine a contracting mechanism through which incumbents maintain market power: “pay-for-delay” agreements to delay the market entry of competitors. Exploiting a shock where such contracts become legally tenuous, we find that affected incumbents subsequently increase their innovation activity across a variety of project-level measures. Exploring the nature of this innovation, we also find that it is more “impactful” from a scientific and commercial standpoint. The results provide novel evidence that restricting the contracting space can boost innovation at the firm level. However, at the extensive margin we find a reduction in innovation by new entrants in response to increased competition, suggesting a nuanced effect on aggregate innovation.

Based on a reduced-form model of credit risk, we explore mispricing in the credit default swaps (CDS) spreads of North American companies and its economic content. Specifically, we develop a trading strategy using the model to trade out of sample market-neutral portfolios across the term structure of CDS contracts. Our empirical results show that the trading strategy exhibits abnormally large returns, confirming the existence and persistence of a mispricing. The aggregate returns of the trading strategy are positively related to the square of market-wide credit and liquidity risks, indicating that the mispricing is more pronounced when the market is more volatile. When implemented on the Markit data, the strategy shows significant economic value even after controlling for realistic transaction costs.

Investors do not hold optimal portfolios. We use an experimental method to isolate factors that compel individuals to hold optimal portfolios. Our design includes two risky assets with perfectly negatively correlated payoffs so that all risk can be eliminated. We find that participants’ holdings approach optimal portfolios only under very specific conditions: the variance cost of holding an imbalanced portfolio is substantial and feedback on period-by-period outcomes is suppressed (eliminating the impact of cognitive biases resulting from misperceptions of randomness).