Knowledge that Transforms

[We investigate the trade-off between incentive provision and inefficient rollover freezes for a firm financed with short-term debt. First, debt maturity that is too short-term is inefficient, even with incentive provision. The optimal maturity is an interior solution that avoids excessive rollover risk while providing sufficient incentives for the manager to avoid riskshifting when the firm is in good health. Second, allowing the manager to risk-shift during a freeze actually increases creditor confidence. Debt policy should not prevent the manager from holding what may appear to be otherwise low-mean strategies that have option value during a freeze. Third, a limited but not perfectly reliable form of emergency financing during a freeze—a "bailout"—may improve the terms of the trade-off and increase total ex ante value by instilling confidence in the creditor markets. Our conclusions highlight the endogenous interaction between risk from the asset and liability sides of the balance sheet.]

[We use an important legal event to examine the effect of managerial fiduciary duties on equity-debt conflicts. A 1991 legal ruling changed corporate directors' fiduciary duties in Delaware firms, limiting managers' incentives to take actions that favor equity over debt for distressed firms. After this, affected firms responded by increasing equity issues and investment and by reducing risk. The ruling was also followed by an increase in leverage, reduced reliance on covenants, and higher values. Fiduciary duties appear to affect equitybondholder conflicts in a way that is economically important, has impact on ex ante capital structure choices, and affects welfare.]

[This article proposes a theory of investment fluctuations in which the source of the oscillating dynamics is an agency problem between financiers and entrepreneurs. In the model, investment decisions depend on entrepreneurs' initiative to select investment projects ex ante, and financiers' incentive to control entrepreneurs ex post. Too much control discourages entrepreneurial incentive to initiate new investment, whereas too little control jeopardizes its productivity. This initiative-control trade-off is capable of generating endogenous reversal of investment booms, induced by an ongoing deterioration of project profitability. Investment fluctuations may arise even though no external shocks hit the economy and agents are perfectly rational.]

[I propose a new measure that identifies when the market price of an over-the-counter traded asset is below its fundamental value due to selling pressure. The measure is the difference between prices paid by small traders and those paid by large traders. In a model for overthe-counter trading with search frictions and periods with selling pressures, I show that this measure identifies liquidity crises (i.e., high number of forced sellers). Using a structural estimation, the model is able to identify liquidity crises in the U.S. corporate bond market based on the relative prices paid by small and large traders. New light is shed on two crises, the downgrade of General Motors and Ford in 2005 and the subprime crisis.]

[This article investigates the information content of signals about the identity of investors and their role in price formation. Whereas we document that investors use multiple brokers, broker identity is nevertheless a powerful signal about the identity of investors who initiate trades. The market also correctly processes this signal: the permanent price impact of orders coming from different brokers fits the information profile of the investors associated with these brokers. Our results suggest that an increase in the degree of anonymity may render order flow less informative, which could explain why the literature has documented liquidity improvements in exchanges that reduce transparency.]

[We propose a model of delegated asset management that can explain the following empirical regularities in international markets: the presence of home bias, the lower proportion of mutual funds investing domestically, and the higher market value of mutual funds investing domestically. In the model, fund managers choose whether to specialize in domestic or foreign assets. Individual investors are uncertain about managers' abilities, and they are more informed about domestic markets. This makes domestic investments less risky and generates home bias. Home bias is magnified because higher-ability managers specialize in domestic assets, making them even more attractive to the investors.]

[We use a structural econometric model to provide empirical evidence that safety nets in the banking industry lead to additional risk taking. To identify the moral hazard effect of bailout expectations on bank risk, we exploit the fact that regional political factors explain bank bailouts but not bank risk. The sample includes all observed capital preservation measures and distressed exits in the German banking industry during 1995—2006. A change of bailout expectations by two standard deviations increases the probability of official distress from 6.6% to 9.4%, which is economically significant.]

[We test whether and how equity overvaluation affects corporate financing decisions using an ex ante misvaluation measure that filters firm scale and growth prospects from market price. We find that equity issuance and total financing increase with equity overvaluation, but only among overvalued stocks, and that equity issuance is more sensitive than debt issuance to misvaluation. Consistent with managers catering to maintain overvaluation and with investment-scale economy effects, the sensitivity of equity issuance and total financing to misvaluation is stronger among firms with potential growth opportunities (low book-to-market, high R&D, or small size) and high share turnover.]

[Previous findings regarding the risk-shifting behavior of mid-year underperforming mutual fund managers are mixed. In this article, I show that this is due to a "sorting bias," which is caused by the sorting of first-half risk levels when establishing relative midyear performance. Even without risk-shifting behavior, mean reversion of these sorted risk levels results in the detection of tournament behavior. After correcting for this bias, I find evidence supporting the hypothesis that first-half underperforming managers increase portfolio risk during the second half of the year and that this tournament behavior is not dependent on first-half market conditions.]

[We compare the ability of three measurement error remedies to deliver unbiased estimates of coefficients in investment regressions. We examine high-order moment estimators, dynamic panel estimators, and simple instrumental variables estimators that use lagged mismeasured regressors as instruments. We show that recent investigations of this question are largely uninformative. We find that all estimators can perform well under correct specification, all can be biased under misspecification, and misspecification is easiest to detect in the case of high-order moment estimators. We develop and demonstrate a minimum distance technique that extends the high-order moment estimators to be used on unbalanced panel data.]