Knowledge that Transforms

Journal Article Cover Get access The Review of Financial Studies, Volume 28, Issue 2, February 2015, Page i1, https://doi.org/10.1093/rfs/hhu107 Published: 07 January 2015

Journal Article Cover Get access The Review of Financial Studies, Volume 28, Issue 11, November 2015, Page i1, https://doi.org/10.1093/rfs/hhu099 Published: 07 October 2015

Journal Article Volume 28 Number 4 April 2015The Review of Financial Studies - Table of Contents Get access The Review of Financial Studies, Volume 28, Issue 4, April 2015, Page i4, https://doi.org/10.1093/rfs/hhu118 Published: 09 March 2015

Journal Article Volume 28 Number 7 July 2015The Review of Financial Studies - Table of Contents Get access The Review of Financial Studies, Volume 28, Issue 7, July 2015, Page i4, https://doi.org/10.1093/rfs/hhu130 Published: 03 June 2015

We analyze the determinants of a firm's ownership structure when decisions over risk are taken by majority vote of risk-averse shareholders. We show that when a fraction of small, diversified shareholders abstains from voting, mid-sized blockholders may emerge to mitigate the conflict of interests between one large shareholder, who prefers less risky investments, and these small, non-voting shareholders. The paper offers a novel explanation for the puzzling observation that many firms have multiple blockholders. The paper develops numerous empirical implications, for example on the link between ownership structure and risk choices and on the relative size of blocks.

Evaluating agency theory and optimal contracting theory views of corporate philanthropy, we find that as corporate giving increases, shareholders reduce their valuation of firm cash holdings. Dividend increases following the 2003 Tax Reform Act are associated with reduced corporate giving. Using a natural experiment, we find that corporate giving is positively (negatively) associated with CEO charity preferences (CEO shareholdings and corporate governance quality). Evidence from CEO-affiliated charity donations, market reactions to insider-affiliated donations, its relation to CEO compensation, and firm contributions to director-affiliated charities indicates that corporate donations advance CEO interests and suggests misuses of corporate resources that reduce firm value.

We study the dynamics of an innovative industry when agents learn about its strength, i.e., the likelihood that it gets hit by negative shocks. Managers can exert risk-prevention effort to mitigate the consequences of such shocks. As time goes by, if no shock occurs, confidence improves. This attracts managers to the innovative sector. But, when confidence becomes high, less managers exerting low risk-prevention effort also enter. This accelerates the growth of the industry, while inducing a decline in risk-prevention. The longer the boom, the stronger the confidence, the larger the losses if a shock occurs. While the above dynamics arise in the first best, with asymmetric information there is excessive entry of inefficient managers, earning informational rents at the expense of efficient managers. This inflates the innovative sector and increases its vulnerability.

This paper is a new incarnation of the defunct work previously circulated under the titles "Neoclassical Factors," "An equilibrium three-factor model," "Production-based factors," "A better three-factor model that explains more anomalies," and "An alternative three-factor model." We are extremely grateful to Robert Novy-Marx

Previous studies of liquidity in the foreign exchange (FX) market span short time periods or focus on specific measures of liquidity. In contrast, we provide a comprehensive study of FX liquidity and commonality over more than two decades and a cross-section of forty exchange rates. After identifying the most accurate liquidity proxies based on low-frequency and readily available data, we show that commonality in FX liquidities is stronger for developed currencies and in highly volatile markets. We also show that FX liquidity deteriorates with risk in stock, bond and FX markets, and that riskier currencies are more exposed to liquidity drops.

We present a model that explains why investment bankers struggle to manage conflicts of interest. Banks can build a type reputation for technical competence by performing complex deals that may not serve their clients' interest; on the other hand, banks can sustain a behavioral reputation by refraining from doing so. A behavioral reputation is a luxury reserved for banks that have proven their abilities. The model sheds light on conflicts between the trading and advisory divisions of investment banks, as well as the consequences of technological change for time variation in the relative strength of behavioral- and type-reputation concerns.