I examine the effects of venture capital backing on the corporate governance of the entrepreneurial firm at the time of transition from private to public ownership. Using a selection model framework that instruments for venture backing with variations in the supply of venture capital, I conduct three sets of tests comparing corporate governance in venture- and non–venture-backed initial public offering (IPO) firms. Venture-backed firms have lower levels of earnings management, more positive reactions to the adoption of shareholder rights agreements, and more independent board structures than similar non–venture-backed firms, consistent with better governance. These effects are not common to all pre-IPO large shareholders.

This paper studies the optimal combination of debt and dividend commitments in an agency model of the firm. Financial policy is relevant because ex-post information asymmetryrequires managerial rewards to depend on the ability to meet financial commitments. If perquisite or inside information problems exist in isolation, debt-based incentives as assumed inprevious studies result endogenously. If the problems exist simultaneously, dividends can beoptimal even when they appear excessively costly as a signal and unduly lenient as a disciplining device. The reason is that the set of dynamically consistent rewards increases when debt commitments are augmented with dividend commitments, and a larger set of ex-post rewards is more valuable as ex-ante decisions become more complex.

We study the liquidity demand of large settlement banks in the UK and its effect on the money markets before and during the subprime crisis of 2007–08. We find that the liquidity demand of large settlement banks experienced a 30% increase in the period immediately following August 9 2007, the day when money markets froze, igniting the crisis. Following this shift, liquidity demand had a precautionary nature in that it rose on days of high payment activity and for banks with greater credit risk. This caused overnight interbank rates to rise, an effect virtually absent in the precrisis period.

The Taylor rule presents a traditional approach to guiding and evaluating contemporary monetary policy as a function of inflation and economic slack. While the responsibilities of the Federal Reserve (Fed) include price stability and long-run growth, its mission has grown to include financial stability. Surprisingly, the question of whether financial stability ought to be considered as an element of monetary policy is hotly contested. This study aims to determine whether policymakers’ discussions of financial stability and other factors systematically explain deviations of observed policy rates from the rates implied by the Taylor rule. To this end, we conduct content analysis of the Fed’s monetary policy discussions to discover actual topics that enter into policy. We offer two main findings: First, discussion themes extracted from released Federal Open Market Committee meeting minutes provide explanatory power beyond standard Taylor rule variables. Second, additional explanatory power is provided by a tri-mandate policy rule that accounts for changes in the economic and financial system as moderated by the evolving preferences of the policymakers. We show that a discussion-based thematic model with financial stability dominates Taylor-type rules during normal times. Moreover, the tri-mandate policy model with financial stability dominates Taylor-type rules in zero lower bound conditions. Taken together, these findings reveal that financial stability has mattered to the Fed continuously and remains critical in setting monetary policy in zero lower bound.

We develop a simple theoretical argument that generates testable predictions about how disagreement affects corporate investment and find strong empirical support for these predictions. Investment is negatively related to a proxy for disagreement, after controlling for Tobin’s q, and after dealing with the fact that Tobin’s q and our disagreement proxy contain measurement error. This proxy is unrelated to traditional indicators of asymmetric information. We also find that variation in disagreement is an important component of the portion of the variation in Tobin’s q that matters for investment, and that disagreement affects investment and Tobin’s q more if the firm has greater financial flexibility.

We explore the effects of fat tails on the equilibrium implications of the long-run risks model of asset pricing by introducing innovations with dampened power law to consumption and dividends growth processes. We estimate the model structural parameters by maximum likelihood. We find that the stochastic volatility model with fat tails can generate implied risk premium, expected risk free rate and their volatilities comparable to the magnitudes observed in data. The model with fat tails leads to a significant increase in implied risk premia over the benchmark Gaussian model, but similar values for other equilibrium quantities of interest.

When firms compete in the managerial labor market, the choice of corporate governance by a firm affects, and is affected by, the choice of governance by other firms. Firms with weaker governance offer managers more generous incentive compensation, which induces firms with good governance to also overpay their management. Due to this externality, overall level of governance in the economy can be inefficiently low. Poor governance can in fact be employed by incumbent firms to deter entry by new firms. Such corporate governance externalities have important implications for regulatory standards, ownership structure of firms, and the market for corporate control.

We document that the deregulation of bank branching restrictions in the United States triggered a reallocation across sectors, with end effects on state-level volatility. The change cannot be explained simply by shifts in sector-level returns and volatility. A reallocation effect is at play, which we study in the context of mean-variance portfolio theory applied to sectoral returns. We find the reallocation is particularly strong in sectors characterized by young, small and external finance dependent firms, and for states that have a larger share of such sectors. The findings suggest that improving bank access to branching affects the sectoral specialization of output, in a manner that depends on the variance-covariance properties of sectoral returns, rather than on their average only.