We construct novel measures of financial constraints using textual analysis of firms’ annual reports and investigate their impact on stock returns. Our three measures capture access to equity markets, debt markets, and external financial markets in general. In all cases, constrained firms earn higher returns, which move together and cannot be explained by the Fama and French (2015) factor model. A trading strategy based on financial constraints is most profitable for large, liquid stocks. Our results are strongest when we consider debt constraints. A portfolio based on this measure earns an annualized risk-adjusted excess return of 6.5%. Received April 4, 2016; editorial decision December 17, 2017 by Editor Andrew Karolyi.

I demonstrate an important tension between acquiring information and incorporating it into asset prices. As a salient case, I analyze algorithmic trading (AT), which is typically associated with improved price efficiency. Using a new measure of the information content of prices and a comprehensive panel of 54, 879 stock-quarters of Securities and Exchange Commission (SEC) market data, I establish instead that the amount of information in prices decreases by 9% to 13% per standard deviation of AT activity and up to a month before scheduled disclosures. AT thus may reduce price informativeness despite its importance for translating available information into prices. Received May 21, 2016; editorial decision October 25, 2017 by Editor Itay Goldstein.

I document a new stylized fact about how investors trade assets: individuals are more likely to sell the extreme winning and extreme losing positions in their portfolio ("the rank effect"). This effect is not driven by firm-specific information, holding period or the level of returns itself, but is associated with the salience of extreme portfolio positions. The rank effect is exhibited by both retail traders and mutual fund managers. The effect indicates that trades in a given stock depend on how the stock compares to other positions in an investor's portfolio.

A model of the nominal term structure of interest rates is developed that has a positive and stationary process for the interest rate and delivers closed-form expressions for the prices of discount bonds and European options on bonds. Unlike the one-state-variable version of the Cox, Ingersoll, and Ross (1985) model, this model—even in its one-state-variable version—allows the term premium to change sign as a function of the state and the term to maturity, and also allows for shapes of the yield curve that are observed in the U.S. data but that are disallowed in the Cox, Ingersoll, and Ross model

When the market can observe the profitability of all projects with equal precision, then with stock compensation (1) the weight on any given project in managerial compensation is independent of the marginal productivity of effort in the project; (2) the projects that are the noisiest indicators of managerial effort receive the most weight in compensation; and (3) investors have the greatest incentive to collect information about projects that are the noisiest indicators of managerial effort. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

This article examines the linkages between equity markets. The authors present a detailed analysis of the correlations between roughly coincident returns in different equity markets. They also uncover an intriguing fact: The volatility of the London stock market is higher than usual around the time when the NYSE opens. This may support their contagion theory, which argues that traders in one market draw inferences about shocks to share-price fundamentals from observed price movements in other markets. Even price moves which are not generated by fundamentals can therefore affect many markets. The findings raise two basic questions about the comovements in international equity markets. The first is whether there is any reason to expect the correlations across markets to be stable through time. This article emphasizes that returns on the London, New York, and Tokyo markets were more highly correlated around the market break of October 1987 than in other periods....

Most models of financial structure embody an assumption about financial distress that causes debt to be costly to the issuing firm. This approach has been criticized on the grounds that the assumed costs could be avoided by a costless financial reorganization. In this article we show that despite the possibility of costless reorganization, it may be rational for firms to incur significant costs in the resolution of financial distress. The main assumptions that give rise to our results are the existence of asymmetric courts to impose a reorganization on the claimants of a firm. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Fama (1977) and Miller (1977) predict that one minus the corporate tax rate will equate after tax yields from comparable taxable and tax-exempt bonds. Empirical evidence shows that long-term tax-exempt yields are higher than theory predicts. Two popular explanations for this empirical puzzle are that, relative to taxable bonds, municipal bonds bear more default risk and include costly call options. I study U.S. government secured municipal bond yields which are effectively default-free and noncallable. These municipal yields display the same tendency to be too high. I conclude that differential default risk and call options do not explain the municipal bond puzzle.

A model of trading in speculative markets is developed based on differences of opinion among traders. Our purpose is to explain some of the empirical regularities that have been documented concerning the relationship between volume and price and the time-series properties of price and volume. We assume that traders share common prior beliefs and receive common information but differ in the way in which they interpret this information. Some results are that absolute price changes and volume are positively correlated, consecutive price changes exhibit negative serial correlation, and volume is positively autocorrelated.