We examine whether banks better protect themselves against risk-shifting as compared to non-bank lenders by comparing risk management polices across firms that borrow from different lenders using a unique, hand-collected data set of hedging and borrowing practices. Consistent with banks being effective monitors, we find hedging is positively associated with the proportion of bank debt amongst firms with large risk-shifting incentives. We present descriptive evidence showing that banks use covenants as one of the channels to mitigate risk-shifting.

We examine the effects of regulations designed to address the potential conflict of interest that arises when sell-side analyst research is not independent of investment banking. We focus on two types of regulation: (1) internal barriers between equity research and investment banking that restrict communication; and (2) disclosure requirements relating to analyst compensation. We find that information barriers can increase research effort and improve report quality by limiting an investment bank's ability to distort its analyst's incentives. However, this type of regulation can also reduce information production and lower the quality of reports if an investment bank benefits directly from research activity. Disclosure requirements, on the other hand, unambiguously lead to more informative prices and a higher report quality relative to either information barriers or no regulation.

Almost one-third of actively managed, diversified U.S. equity mutual funds specify a size and value/growth benchmark index in the fund prospectus that does not match the fund's actual style. Nevertheless, these “mismatched” benchmarks matter to fund investors. Performance relative to the specified benchmark is a significant determinant of a fund's subsequent cash inflows, even controlling for performance measures that better capture the fund's style. These incremental flows appear unlikely to be rational responses to abnormal returns. The evidence is consistent with the notion that mismatched self-designated benchmarks result from strategic fund behavior driven by the incentive to improve flows.

This paper proposes a representative agent habit-formation model where preferences are defined for both luxury goods and basic goods. The model matches the equity risk premium, risk-free rate, and volatilities. From the intratemporal first-order condition, one can substitute out basic good consumption and the habit level, yielding a stochastic discount factor driven by two observable risk factors: luxury good consumption and the relative price of the two goods. I estimate these processes and find them to be heteroskedastic, implying time variation in the conditional volatility of the stochastic discount factor. These dynamics occur both at the business cycle frequency and at a lower, "generational" frequency. The findings reveal that the time variation in aggregate stock market and Treasury bond risk premiums are consistent with the predictions of the model. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: [email protected], Oxford University Press.

The revelation that scores of firms engaged in the illegal manipulation of stock options’ grant dates (i.e. “backdating”) captured much public attention. The evidence indicates that the consequences stemming from management misconduct and misrepresentation are of first-order importance in this context as shareholders of firms accused of backdating experience large negative, statistically significant abnormal returns. Furthermore, shareholders’ losses are directly related to firms’ likely culpability and the magnitude of the resulting restatements, despite the limited cash flow implications. And, tellingly, the losses are attenuated when tainted management of less successful firms is more likely to be replaced and relatively many firms become takeover targets.

Subsequent to Feltham and Ohlson 1995 and Ohlson 1995, the accounting literature has published a large numbers of papers on accounting data and value.1 A review of this literature reveals that many themes and insights recur across the papers. With the advantage of hindsight, the repetitions seem inefficient. A student who takes a stab at familiarizing herself with subject matter naturally tends to view such a state of affairs as less than ideal. Questions like “What is it that I really need to understand?” or “Taken in its totality, what ideas and results make the literature tick?” arise. This paper addresses the essence of such questions. It states the central results as eight simple formal propositions. Because all the propositions are freestanding, they can, at least in principle, be internalized independently of each other. But the sequencing is in fact relevant because it introduces step-by-step increasingly sophisticated concepts. The concepts build upon each other; the propositions’ analytical simplicity should, therefore, not be taken as a sign that they are conceptually simplistic. Much discussion follows the propositions to spell out their broader significance. And the paper approaches this task always maintaining the texture of accounting: the central variables are earnings, book values, and dividends. The paper does not digress on proofs and finer analytical points. These aspects are of little interest, which is another way of saying that the paper focuses squarely on analytical constructs/representations and how these fit together. Nor does this paper elaborate on the extent to which the literature has already dealt with the results or insights. There is no question that most, if not all, results have had some kind of presence and thus lack novelty. That said, such cataloguing and related discussion would have been long and tedious without facilitating a better understanding of the insights I wish to convey. Aside from trying to systemize the literature, and thereby making it more accessible to the average reader, the paper also has a more ambitious objective. It goes to the heart of subject matter: the exposition should give the reader the sense that all pieces and insights interrelate logically and conceptually. In other words, the task at hand is to go beyond a listing of useful results (though this should hopefully be the case, too), and instead give a sense of how the various pieces coalesce into a whole. The development of such a coherent mental map allows the reader to think of the broad literature in an integrated fashion, rather than as consisting of loosely connected, or even competing, models that primarily differ in their empirical

ABSTRACT Numerous proxies for divergence of investors' opinions have been suggested in the empirical accounting and finance literatures. I offer a new proxy constructed from proprietary limit order and market order data. This allows me to capture additional information on investors' private valuations. Proxies from the extant literature, based on publicly available data, do not contain such information. Given my new measure, I ask which of the extant proxies correlates best with it. In my regression analysis, unexplained volume is the best proxy for opinion divergence. Conditioning on various firm‐specific and order‐specific characteristics generally does not change this conclusion. The main exception is the sample of firms without IBES forecast dispersion data, for which bid‐ask spread is the best proxy for opinion divergence. Factor analysis also suggests that unexplained volume is the preferred proxy for opinion divergence.