We model the interaction between product market competition and internal governance at firms. Competition makes it more difficult to infer a manager’s action given the realized output, thus increasing the cost of inducing effort. An exogenous change in the incentive to shirk increases managerial slack. However, the effects on firm value are ambiguous; in particular, firm value can increase as slack increases. As a result, empirical tests that focus on changes in value may not capture changes in the level of slack. We also provide conditions under which increased competition leads all firms to switch from high to low effort.

We analyze the costs and benefits of clawback provisions that enable firms to recover incentive compensation from top management if financials are restated. In a simple contracting model, we find that a clawback provision effectively lengthens the horizon of incentives and curbs misreporting. However, such a provision can add noise to the underlying performance measure, reducing managerial effort and firm value. Our empirical tests support the model’s predictions regarding which types of firms are likely to voluntarily use clawback provisions. We also document that clawback provisions are associated with higher reporting quality, greater CEO pay-for-performance sensitivity, and higher CEO compensation.

We study the pricing behaviour of a multiproduct firm, when consumers must pay a search cost to learn its prices. Equilibrium prices are high, because consumers understand that visiting a store exposes them to a hold-up problem. However, a firm with more products charges lower prices, because it attracts consumers who are more price sensitive. Similarly, when a firm advertises a low price on one product, consumers rationally expect it to charge somewhat lower prices on its other products as well. We therefore find that having a large product range, and advertising a low price on one product, are substitute ways of building a “low-price image”. Finally, we show that in a competitive setting each product has a high regular price, with firms occasionally giving random discounts that are positively correlated across products.

This study finds that equity returns in the banking sector in the wake of the Great Recession and the European sovereign debt crisis have been driven mainly by weak growth prospects and heightened sovereign risk; and to a lesser extent by deteriorating funding conditions and investor sentiment. While the equity return performance in the banking sector has been dismal in general, there is some evidence that better capitalized and less leveraged banks have outperformed their peers in times of stress.

We challenge a common presumption that poison pills and two Delaware case rulings in 1995 validating such pills materially entrench firms. Based on unsolicited takeover attempts from 1985 to 2009, we find that poison pills enhance takeover premiums, but do not reduce completion rates. Furthermore, the 1995 Delaware rulings affected neither the use of poison pills among the targets, the effectiveness of the pills that were used, the completion rate of the takeover attempts, nor the takeover premiums.

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This paper investigates the effect of corporate diversification on the pricing of bank-loan contracts. We find that diversified firms have significantly lower loan rates than comparable focused firms, and we find no evidence that diversified firms are subject to more restrictive non-price contract terms pertaining to maturity, collateral requirements, and covenant restrictions. We show that the effect of diversification on the cost of a bank loan is channeled primarily through coinsurance in investment opportunities and cash flows and that the effect is nonlinear: as the extent of corporate diversification grows, the cost-reduction benefit of diversification decreases. Our results indicate that the organizational structure of the firm can alleviate its external financing constraints and that it has an important bearing on the firm’s financing capacity.

In this study, we test the predictive power of several alternative measures of bank capital adequacy in identifying U.S. bank failures during the recent crisis period. We find that an unconventional ratio – the non-performing asset coverage ratio (NPACR) – significantly outperforms Basel-based ratios including the Tier 1 ratio, the Total Capital Ratio, and the Leverage ratio – throughout the crisis period. It also outperforms in predicting failures among “well-capitalized” banks (as defined by the current Prompt Corrective Action guidelines). Based on our results, we argue that NPACR outperforms other ratios in at least five aspects: (i) it aligns capital and credit risks – the two primary risks of bank failures – in one measure; (ii) it is easier to calculate than the Tier 1 and Total Capital ratios, as it requires calculation of no complex risk weights; (iii) it allows one to account for various time period and cross-country provisioning rules and regimes, including episodes of regulatory forbearance and cross-country differences; (iv) it removes the incentives of both banks and regulators to mask capital deficiencies by creating/requiring insufficient loan-loss reserves; and (v) it outperforms all other commonly used capital ratios in predicting bank failures. We believe that all the above features of proposed measure promise its effective use in the prompt corrective actions by bank regulators. We also expect that this single and informative measure of bank risk can be efficiently used in empirical banking studies. The results of this study also shed light on regulatory forbearance during the recent banking crisis.