We examine the effect of credit default swaps (CDSs) on debt specialization. We argue that reference firms in CDS contracts, seeking to minimize creditor conflicts and bankruptcy costs, exhibit higher debt concentration than firms on which no CDSs are traded. Our results show that firms engage in greater debt specialization and are more likely to specialize following the inception of CDS trading. Additionally, we find that, while lender concentration in firms increases, the number of bank lenders drops, lead arranger share rises, and the probability that lead arrangers and lenders are repeated increases following the onset of CDS trading. Our results are robust to instrumental variable estimation, propensity-score matching, different model specifications, and different subsamples.

We reevaluate the IPO underpricing phenomenon using the stochastic frontier methodology. The advantage of the stochastic frontier is that it can be used to measure the level of deliberate underpricing in the premarket without using after-market information. This is accomplished through the estimation of a systematic one-sided error term that measures “inefficiency” or the difference between the maximum predicted offer price and the actual offer price. Data for the analysis are comprised of 1,035 IPOs of common stock issued by firm commitment between 1975 and 1984. IPOs appear to be deliberately underpriced in the premarket in both hot-market and nonhot-market periods. Moreover, the determinants of the maximum IPO price have different effects in the two time periods.

The financial crisis prompted widespread interest in developing a better understanding of how capital regulation drives bank behavior. This paper uses a unique, comprehensive database of regulatory capital requirements on all UK banks to examine their effects on capital, lending and balance sheet management behavior. We find that capital requirements that include firm-specific, time-varying add-ons set by supervisors affect banks’ desired capital ratios and that resulting adjustments to capital and lending depend on the gap between actual and target ratios. We use these results to measure the effects of a capital regime that includes features similar to those embedded in the UK framework. Our results suggest that countercyclical capital requirements may be less effective in slowing credit activity when banks can readily satisfy them with lower-quality (lower-costing) capital elements versus higher-quality common equity. Given the size of the UK banking sector and the global nature of many of the largest institutions in the UK banking sector, the results have implications for the ongoing debate surrounding the design and calibration of international capital standards.

We examine the impact of stock-price formation process on firms’ dividend smoothing using Regulation SHO. We find that pilot firms are more likely to increase dividends and less likely to omit them during the pilot program; however, they are more likely to decrease dividends after the program ends. These firms also smooth less and have higher adjustment speeds. Our findings are more pronounced for firms with higher information asymmetry, stronger financials, and weaker governance. In general, this study shows that financial markets tend to have a significant and long-lasting impact on dividend smoothing policy.

While the importance of currency movements to industry competitiveness is theoretically well established, there is little evidence that currency risk impacts US industries. Applying a conditional asset pricing model to 36 US industries, we find that all industries have a significant currency premium that adds about 2.47 percentage points to the cost of equity and accounts for approximately 11.7% of total risk premium in absolute value. Cross-industry variation in the currency premium is explained by foreign income, industry competitiveness, leverage, liquidity, and other industry characteristics, while its time variation is explained by US aggregate foreign trade, monetary policy, growth opportunities, and other macro variables. The results indicate that methodological weakness, not hedging, explains the insignificant industry currency risk premium found in previous work, thus resolving the puzzle that currency risk premium is important at the aggregate stock market level, but not at the industry level.

This paper examines how bank regulation and supervision measures affect the synchronicity of bank stock returns, a measure that is negatively related to variations in bank-specific fundamentals and stock price informativeness. Using data from World Bank surveys in 35 countries, we find that bank stock returns are less synchronous in countries with more stringent capital regulations, more supervision that emphasizes private monitoring, and less government bank ownership. On the other hand, direct government control of bank activities, as well as direct government monitoring and disciplining, do not reduce stock return synchronicity.

We use unique features of the private credit market to examine if and how currency risk impacts firms' financing and whether currency risk is a priced systematic risk at the firm level. We find that currency exposure has a large impact on loan spreads. Decomposing loan spreads, we find that exposure increases the expected default loss premium and that internationalization, growth opportunities, and relationship intensify exposure's impact. Further, exposure exacerbates firms' financing risk by increasing the need for collateral, reducing loan maturity, inducing monitoring and covenant intensity, and influencing syndicate structure. However, exposure does not affect the expected return premium in loan spreads; hence, currency risk does not appear priced in the classical sense and, therefore, should not affect the “true” cost of debt. Our findings imply that while managers should be concerned about exposure's impact on their access to, and terms of, bank financing, they should not adjust hurdle rates on account of exposure when assessing investment projects.

Studies document persistent unexplained gender-based wage gap in labor markets. At the executive level, where skill and education are similar, career interruptions and differences in risk preferences primarily explain the extant gender-based pay gap. This study focuses on CFO compensation contracts of Execucomp firms (1992–2020) and finds no gender-based pay gap. This paper offers several explanations for this phenomenon, such as novel evidence on the risk preferences of females with financial expertise and changes in the social and regulatory climate.

In the presence of high uncertainty and limited experience, can observing the actions of other acquiring predecessors help firms make better acquisition decisions? Using a sample of cross-border M&As conducted by US acquirers in developing countries, we document a positive and significant relationship between an acquirer's performance and its predecessors' acquisition activity. This relationship is especially pronounced in the prevalence of news events about the outcome of predecessors' acquisitions, when predecessors consist of US peers from the same industry and/or when targets are based in culturally distant countries. Our findings shed light on one channel through which information spillovers across industries and acquiring firms could be a key driver of value creation in developing market cross-border M&As.

We examine the relation between the agglomeration of firms around big cities and chief executive officer (CEO) compensation. We find a positive relation among the metropolitan size of a firm’s headquarters, the total and equity portion of its CEO’s pay, and the quality of CEO educational attainment. We also find that CEOs gradually increase their human capital in major metropolitan areas and are rewarded for this upon relocation to smaller cities. Taken together, the results suggest that urban agglomeration reflects local network spillovers and faster learning of skilled individuals, for which firms are willing to pay a premium and which are therefore important factors in CEO compensation.