This study compares the market value of firms that reorganize in bankruptcy with estimates of value based on management's published cash flow projections. We estimate firm values using models that have been shown in other contexts to generate relatively precise estimates of value. We find that these methods generally yield unbiased estimates of value, but the dispersion of valuation errors is very wide-the sample ratio of estimated value to market value varies from less than 20% to greater than 250%. Cross-sectional analysis indicates that the variation in these errors is related to empirical proxies for claimholders' incentives to overstate or understate the firm's value.

[How are governance practices propagated across firms? This article proposes, and empirically verifies, that observed governance practices are partly the outcome of network effects among firms with common directors. While firms attempt to select directors whose other directorships are at firms with similar governance practices ("familiarity effect"), this matching of governance practices is imperfect because other factors also affect the director choice. This generates an "influence effect" as directors acquainted with different practices at other firms influence the firm's governance to move toward the practices of those other firms. These network effects cause governance practices to converge.]

How are governance practices propagated across firms? This article proposes, and empirically verifies, that observed governance practices are partly the outcome of network effects among firms with common directors. While firms attempt to select directors whose other directorships are at firms with similar governance practices (“familiarity effect”), this matching of governance practices is imperfect because other factors also affect the director choice. This generates an “influence effect” as directors acquainted with different practices at other firms influence the firm's governance to move toward the practices of those other firms. These network effects cause governance practices to converge.

[We analyze event abnormal returns when returns predict events. In fixed samples, we show that the expected abnormal return is negative and becomes more negative as the holding period increases. Asymptotically, abnormal returns converge to zero provided that the process of the number of events is stationary. Nonstationarity in the process of the number of events is needed to generate a large negative bias. We present theory and simulations for the specific case of a lognormal model to characterize the magnitude of the small-sample bias. We illustrate the theory by analyzing long-term returns after initial public offerings (IPOs) and seasoned equity offerings (SEOs).]

This article illustrates an incentive-aligning role of debt in the presence of optimal compensation contracts. Owing to information asymmetry, value-maximizing compensation contracts allow managerial rents following high investment outcomes. The manager has an incentive to increase these rents by choosing investments that generate greater information asymmetry. An aptly chosen debt level mitigates this incentive, because investments that generate greater information asymmetry have more volatile outcomes. The greater volatility would make the debt risky, causing the shareholders to focus on high outcomes and therefore compensation contracts that reduce managerial rents. At the optimum, the manager avoids opportunistic investments, and the shareholders offer value-maximizing compensation contracts. Empirically, the analysis predicts a negative relationship between leverage and market-to-book that is reversed at extreme market-to-book ratios, a negative relationship between leverage and profitability, a negative relationship between leverage and pay-for-performance, and a positive relationship between pay-for-performance and investment opportunities.

This article illustrates an incentive-aligning role of debt in the presence of optimal compensation contracts. Owing to information asymmetry, value-maximizing compensation contracts allow managerial rents following high investment outcomes. The manager has an incentive to increase these rents by choosing investments that generate greater information asymmetry. An aptly chosen debt level mitigates this incentive, because investments that generate greater information asymmetry have more volatile outcomes. The greater volatility would make the debt risky, causing the shareholders to focus on high outcomes and therefore compensation contracts that reduce managerial rents. At the optimum, the manager avoids opportunistic investments, and the shareholders offer value-maximizing compensation contracts. Empirically, the analysis predicts a negative relationship between leverage and market-to-book that is reversed at extreme market-to-book ratios, a negative relationship between leverage and profitability, a negative relationship between leverage and pay-for-performance, and a positive relationship between pay-for-performance and investment opportunities.

Implied volatility is widely believed to be informationally superior to historical volatility, because it is the “market’s” forecast of future volatility. But for S&P 100 index options, the most actively traded contract in the United States, we find implied volatility to be a poor forecast of subsequent realized volatility. In aggregate and across subsamples separated by maturity and strike price, implied volatility has virtually no correlation with future volatility, and it does not incorporate the information contained in recent observed volatility.

[Using over 5,000 trades unequivocally based on nonpublic information about firm fundamentals, we find that asymmetric information proxies display abnormal values on days with informed trading. Volatility and volume are abnormally high, whereas illiquidity is low, in equity and option markets. Daily returns reflect the sign of private signals, but bidask spreads are lower when informed investors trade. Market makers’ learning under event uncertainty and limit orders help explain these findings. The cross-section of information duration indicates that traders select days with high uninformed volume. Evidence from the U.S. SEC Whistleblower Reward Program and the FINRA involvement addresses selection concerns.]

Although acquisitions are a popular form of investment, the link between rms' nancial constraints and acquisition policies is not well understood. We develop a model in which nancially constrained bidders approach targets, decide how much to bid and whether to bid in cash or in stock. In equilibrium, nancial constraints do not aect the identity of the winning bidder, but they lower bidders' incentives to approach the target. Auctions are initiated by bidders with low constraints or high synergies. The use of cash is positively related to synergies and the acquirer's gains from the deal and negatively to nancial constraints. (D44, G32,

In this paper, we study asset prices in a dynamic, continuous-time, and general-equilibrium endowment economy in which agents have "catching up with the Joneses" utility functions and differ with respect to their beliefs (because of differences in priors) and their preference parameters for time discount, risk aversion, and sensitivity to habit. A key contribution of our paper is to demonstrate how one can obtain a closed-form solution to the consumption-sharing rule for agents who have both heterogeneous priors and heterogeneous preferences without restricting the risk aversion of the two agents to special values. We solve in closed form also for the state-price density, the risk-free interest rate and market price of risk, the stock price, equity risk premium, and volatility of stock returns, the term structure of interest rates, and the conditions necessary to obtain a stationary equilibrium in which both agents survive in the long run. The methodology we develop is sufficiently general in that, as long as markets are complete, it can be used to obtain the sharing rule and state prices for models set in discrete or continuous time and for arbitrary endowment and belief updating processes.