Knowledge that Transforms

We model a retail financial institution that outsources its advice services to an intermediary, making the two parties jointly responsible for consumers' experience with the products. In this context, courts that enforce state-contingent legal rules are necessary in order to avoid market breakdowns. To maximize social welfare, the government implements a system of penalties that depends on product characteristics and on the firm's relative ability to control quality. This legal system emphasizes reliable advice over transaction pace. Furthermore, the implicit team structure of the firm and its intermediary prevents self-regulation from achieving the same social efficiency.

We study the role of shareholder information during the acquisition of widely held firms. When target shareholders share the same information about the post-takeover value, increasing the precision of information has no effect on the expected acquisition price. However, more precise information aggravates the free-rider problem, allowing shareholders to better discern when it is worthwhile to hold out rather than tender their shares. By contrast, when information is dispersed among shareholders, providing shareholders with superior information induces the raider to offer higher prices, thus increasing shareholder value. However, in this case, neither prices nor tendering decisions aggregate any information.

We analyze corporate fraud in a setting in which managers have superior information but are biased against liquidation because of their private benefits from empire building. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To curb fraud, shareholders optimally design corporate governance by jointly choosing audit quality and managerial compensation. We analyze how country-level rules affect these firm-level choices. Our analysis underscores that different country-level governance provisions have different effects on firm-level governance: Some act as substitutes of internal governance mechanisms, whereas others enhance their effectiveness and therefore complement them.

We analyze how firms renegotiate labor contracts to extract concessions from labor. While anecdotal evidence suggests that firms tend to renegotiate wages downward in times of financial distress, there is no empirical evidence that documents such renegotiation, its determinants, and its magnitude. This article attempts to fill this gap. Using a unique data set of airlines, which includes detailed information on wages and pension plans, we document an empirical link between airline financial distress, pension underfunding, and wage concessions.