Diversification by banks affects the systemic risk of the sector. Importantly, Wagner (2010) shows that linear diversification increases systemic risk. We consider the case of securitization, whereby loan portfolios are sliced into tranches with different seniority levels. We show that tranching offers nonlinear diversification strategies, which can reduce the failure risk of individual institutions beyond the minimum level attainable by linear diversification without increasing systemic risk.

Unlike in elementary school, high school teacher effects may be confounded with both selection to tracks and track-level treatments. I document confounding track effects and show that traditional tests for the existence of teacher effects are biased. After accounting for biases, high school algebra and English teachers have smaller test score effects than found in previous studies and value-added estimates are weak predictors of teachers’ future performance. Results indicate that either (a) teachers are less influential in high school than in elementary school or (b) test score effects are a weak measure of teacher quality at the high school level.

In this paper, I examine minority block acquisitions from 1990 to 2009, as well as possible theories for the presence of equity stake purchases. I find that target firms are financially constrained. Acquisitions significantly increase their stock prices at announcement, along with their investment expenditures afterwards. In the two years following the acquisition, 27% (9%) issue new equity (debt) and raise 27% (24%) of their market capitalization. These findings support the theory that equity stakes certify the investment opportunities of target firms. I also find some support for the contracting motive, mostly in countries with good investor protection and a well-performing banking sector.

This study documents a six-fold increase in short-term return reversals during earnings announcements relative to non-announcement periods. Following prior research, we use reversals as a proxy for expected returns market makers demand for providing liquidity. Our findings highlight significant time-series variation in the magnitude of short-term return reversals and suggest that market makers demand higher expected returns prior to earnings announcements because of increased inventory risks that stem from holding net positions through the release of anticipated earnings news. Collectively, our findings suggest that uncertainty regarding anticipated information events elicits predictable increases in the compensation demanded for providing liquidity and that these increases significantly affect the dynamics and information content of market prices.

We model the risk of setting the required fixed-offer price in an IPO given initial uncertainty about value, as well as costs of over and underpricing. Assuming that the goal of issuers in bookbuilt IPOs is to maximize net offering proceeds, our analysis indicates that their optimal strategy is to negotiate a relatively small spread, consistent with material underpricing. Similarly, considering the expected costs of overpricing makes the underpricing of best-efforts IPOs in the interest of issuers. Our results rely on neither asymmetric information nor agency costs and provide support for Hansen's (2001) nearly-optimal “conventional” spread and the view that it evolved from adaptive, imitative behavior, consistent with Alchian's (1950) explanation of how economic players evolve practices to survive under uncertainty and incomplete information, as well as Alchian's (1969) work on how fixed prices and queues can efficiently clear product markets.

Abstract We investigate the role of sentiment and its implications for real assets. Using shipping sentiment proxies that capture market expectations, valuation, and liquidity, we construct sentiment indices for the dry bulk shipping market. Evidence suggests that sentiment affects the monthly returns of real assets. The empirical findings also show that market sentiment serves as a contrarian indicator for future cycle phases in all sectors. Furthermore, a sentiment-based trading simulation exercise on the sale and purchase of vessels shows that investors can benefit from higher returns compared to the buy-and-hold benchmark, while partially offsetting the highly volatile nature of the shipping industry.

Determining whether diversification adds or destroys value is notoriously difficult, leaving open the question of the degree to which any diversification discount can be affected by management quality and oversight. This study uses the unique setting of real estate investment trusts (REITs), which can diversify over property types as well as locations, to examine this issue. We find that REITs that diversify by investing in more locations tend to be valued lower than REITs with a tighter geographical focus. More importantly, our results suggest that the diversification discount is lower for firms with more institutional ownership, especially institutional types that tend to be more active monitors.