We show that the need to “posture” can help solve the holdup problem inherent in many multistage relationships, including those between entrepreneurs and venture capitalists. Posturing arises when an informed party needs to send a strong signal to induce skeptical third parties like employees, suppliers, customers, or competitors to develop/maintain relationships with the firm or take other actions that increase firm value. In the venture capital context, this can be credibly achieved if the VC publicly invests at high prices in later rounds. This tempers holdup by shifting ex-post bargaining power toward the entrepreneur, inducing him to exert greater effort.

Following corporate spinoffs, unit boards are formed from scratch. We find that these "de novo" boards are smaller, more independent, include more outside directors with relevant industry expertise, and derive more industry expertise from outsiders than do industry- and size-matched peers. These differences are observed only when the unit CEO was not the CEO or a director of the pre-spinoff parent firm—that is, when there is a greater need to assess the CEO's ability and match with the firm. We conclude that the need for CEO assessment is an important element of the structure of newly formed boards.

Following corporate spinoffs, unit boards are formed from scratch. We find that these “de novo” boards are smaller, more independent, include more outside directors with relevant industry expertise, and derive more industry expertise from outsiders than do industry- and size-matched peers. These differences are observed only when the unit CEO was not the CEO or a director of the pre-spinoff parent firm—that is, when there is a greater need to assess the CEO's ability and match with the firm. We conclude that the need for CEO assessment is an important element of the structure of newly formed boards.

[We examine over 7400 analyst recommendations made in the year after going public for IPOs from 1999 to 2000. Initiations of coverage at the end of the quiet period come almost exclusively from affiliated analysts, whereas initiations afterward are predominantly from unaffiliated analysts. Contrary to previous findings, we find no evidence that the market discounts recommendations from affiliated analysts once we control for recommendation characteristics and timing. Moreover, analyst coverage in the first year is not affected by underpricing, and after the flurry of initiations at the end of the quiet period, the number of analysts covering a firm during the following 11 months is unrelated to the number of managing underwriters.]

This article studies the role of risk arbitrageurs in takeovers and the source of their advantage. We show how the presence of arbitrageurs affects the value of the target shares, since arbitrageurs are more likely to tender. Therefore an arbitrageur has the informational advantage of knowing he bought shares. In equilibrium, the number of arbitrageurs buying shares and the price they pay are determined endogenously. We also present several empirical implications, including the relationship among trading volume, takeover premium, liquidity of the shares, and the number of risk arbitrageurs investing in one particular deal.

[The dynamics of the unobservable short rate are frequently estimated directly using a proxy. We examine the biases resulting from this practice (the "proxy problem"). Analytic results show that the proxy problem is not economically significant for single-factor affine models. In the two-factor affine model of Longstaff and Schwartz (1992), the proxy problem is only economically significant for pricing discount bonds with maturities of more than five years. We also describe two different numerical procedures for assessing the magnitude of the proxy problem in a general interest rate model. When applied to a nonlinear single-factor model, they suggest that the proxy problem can be economically significant.]

Stock return volatility during the Great Depression has been labeled a “volatility puzzle” because the standard deviation of stock returns was 2 to 3 times higher than any other period in American history. We investigate this puzzle using a new series of building permits and leverage. Our results suggest that volatility in building permit growth and financial leverage largely explain the high level of stock volatility during the Great Depression. Markets factored in the possibility of a forthcoming economic disaster. Received September 30, 2017; editorial decision August 27, 2018 by Editor Philip E. Strahan.

We propose a novel human capital model that decomposes aggregate income risk into highand low-income risk. We find that high-income risk is priced, while low-income risk is insignificant. The high-income factor alone explains 77% of the cross-sectional variation in the twenty-five size and book-to-market portfolios, earns a risk premium of about 7% per year, and its pricing power extends to the full cross-section of individual stocks. It is also related to the value factor, suggesting that the value premium might be compensation for income risk. Overall, our evidence indicates that high-income risk is an important macroeconomic risk factor.

It is well established that value stocks outperform glamour stocks, yet considerable debate exists about whether the return differential reflects compensation for risk or mispricing. Under mispricing explanations, prices of glamour (value) firms reflect systematically optimistic (pessimistic) expectations; thus, the value/glamour effect should be concentrated (absent) among firms with (without) ex ante identifiable expectation errors. Classifying firms based upon whether expectations implied by current pricing multiples are congruent with the strength of their fundamentals, we document that value/glamour returns and ex post revisions to market expectations are predictably concentrated (absent) among firms with ex ante biased (unbiased) market expectations.

[This article uses a unique option data set to provide detailed descriptive statistics on the purchased and written open interest and open buy and sell volume of several classes of investors. We also show that volatility trading through straddles and strangles accounts for a small fraction of option trading volume and presents evidence that a large percentage of call writing is part of covered call positions. Finally, we find that during the stock market bubble of the late 1990s and early 2000 the least sophisticated investors in the data set substantially increased their purchases of calls on growth but not value stocks.]