[Aggregate stock market returns display negative skewness. Firm stock returns display positive skewness. The large literature that tries to explain the first stylized fact ignores the second. This article provides a unified theory that reconciles the two facts by explicitly modeling firm-level heterogeneity. I build a stationary asset pricing model of firm announcement events where firm returns display positive skewness. I then show that crosssectional heterogeneity in firm announcement events can lead to conditional asymmetric stock return correlations and negative skewness in aggregate returns. I provide evidence consistent with the model predictions.]

[We show that, in the presence of correlated investment opportunities across firms, risk sharing between firm shareholders and firm managers leads to compensation contracts that include relative performance evaluation. These contracts bias investment choices toward correlated investment opportunities, and thus create systemic risk. Furthermore, we show that leverage amplifies all such effects. In the context of the banking industry, we analyze recent policy recommendations for firm managerial pay and show how shareholders optimally undo the policies’ intended effects.]

Aggregate stock market returns display negative skewness. Firm stock returns display positive skewness. The large literature that tries to explain the first stylized fact ignores the second. This article provides a unified theory that reconciles the two facts by explicitly modeling firm-level heterogeneity. I build a stationary asset pricing model of firm announcement events where firm returns display positive skewness. I then show that cross-sectional heterogeneity in firm announcement events can lead to conditional asymmetric stock return correlations and negative skewness in aggregate returns. I provide evidence consistent with the model predictions. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

The paper uses bids submitted by primary dealer banks at auctions of sovereign bonds to quantify the price elasticity of demand. The price elasticity of demand correlates strongly with the volatility of returns of the same bonds traded in the secondary market but only weakly with their bid-ask spread. It predicts same-bond post-auction returns in the secondary market, even after controlling for pre-auction volatility. The evidence suggests that the price elasticity of demand is associated with the magnitude of price pressure in the secondary market around auction days and proxies for primary dealer risk-bearing capacity.

We show that, in the presence of correlated investment opportunities across firms, risk sharing between firm shareholders and firm managers leads to compensation contracts that include relative performance evaluation. These contracts bias investment choices toward correlated investment opportunities, and thus create systemic risk. Furthermore, we show that leverage amplifies all such effects. In the context of the banking industry, we analyze recent policy recommendations for firm managerial pay and show how shareholders optimally undo the policies’ intended effects. Received October 31, 2017; editorial decision August 21, 2018 by Editor Wei Jiang.

We test the hypothesis that foreign direct investment promotes corporate governance spillovers in the host country. Using firm-level data from 64 countries during the period 2005–2014, we find that cross-border M&A activity is associated with subsequent improvements in the governance of nontarget firms when the acquirer country has stronger investor protection than the target country. The effect is more pronounced when the target industry is more competitive. Cross-border M&As are also associated with increases in investment and valuation of nontarget firms. Alternative explanations, such as access to global financial markets and cultural similarities, do not appear to explain our findings. Received October 27, 2015; editorial decision March 25, 2018 by Editor Andrew Karolyi.