I provide a revealed-preference-based framework that uses covenant prices and choices to quantitatively study how covenants generate firm benefits by completing debt contracts. I use a rational-expectations-based panel estimator of covenant prices, which does not require quasi-experimental variation, to circumvent the problem of endogenous covenant choices. I find that firms' surpluses exceed the spread paid on a loan. Leverage and interest-rate covenants produce the largest benefits, lending quantitative credence to several standard theories of covenants. Once covenants are chosen, the benefits from fine-tuning them are small, thus rationalizing “boilerplate” covenants. I conclude by discussing the extensions and limitations of my method.

We argue and demonstrate that resource allocation within firms' internal capital markets provides an important force countervailing financial market dislocation. We estimate a structural model of internal capital markets to separately identify and quantify the forces driving the reallocation decision and illustrate how these forces interact with external capital market stress. The weaker (stronger) division obtains too much (little) capital, as though it is 12% (9%) more (less) productive than it really is. Out-of-sample simulated data are consistent with the actual data showing that internal capital markets offset financial market stress during the recent financial crisis by 16%–30%.

Abstract This article studies the impact of the arbitrator selection process on consumer outcomes. Using data from consumer arbitration cases in the securities industry over the past two decades, where we observe detailed information on case characteristics, the randomly generated list of potential arbitrators presented to both parties, the selected arbitrator, and case outcomes, we establish several motivating facts. These facts suggest that firms hold an informational advantage over consumers in selecting arbitrators, resulting in industry-friendly arbitration outcomes. We then develop and calibrate a quantitative model of arbitrator selection in which firms hold an informational advantage in selecting arbitrators. Arbitrators, who are compensated only if chosen, compete with each other to be selected. The model allows us to decompose the firms’ advantage into two components: the advantage of choosing pro-industry arbitrators from a given pool and the equilibrium pro-industry tilt in the arbitration pool that arises because of arbitrator competition. Selecting arbitrators without the input of firms and consumers would increase consumer awards by $60,000 on average relative to the current system. Forty percent of this effect arises because the pool of arbitrators skews pro-industry due to competition. Even an informed consumer cannot avoid this pro-industry equilibrium effect. Counterfactuals suggest that redesigning the arbitrator selection mechanism for the benefit of consumers hinges on whether consumers are informed. Policies intended to benefit consumers, such as increasing arbitrator compensation or giving parties more choice, would benefit informed consumers but hurt the uninformed.

This paper studies voting in corporate director elections. We construct a comprehensive data set of 2,058,788 mutual fund votes over a two-year period. We find systematic heterogeneity in voting: some funds are consistently more management-friendly than others. We also establish the presence of peer effects: a fund is more likely to oppose management when other funds are more likely to oppose it, all else being equal. We estimate a voting model whose supermodular structure allows us to compute social multipliers due to peer effects. Heterogeneity and peer effects are as important in shaping voting outcomes as firm and director characteristics.

We examine gender differences in misconduct punishment in the financial advisory industry. There is a “gender punishment gap”: following an incident of misconduct, female advisers are 20% more likely to lose their jobs and 30% less likely to find new jobs, relative to male advisers. The gender punishment gap is not driven by gender differences in occupation, productivity, nature of misconduct, or recidivism. The gap in hiring and firing dissipates at firms with a greater percentage of female managers and executives. We also explore the differential treatment of ethnic minority men and find similar patterns of “in-group” tolerance.

We document the economywide extent of misconduct among financial advisers and the associated labor market consequences. Seven percent of advisers have misconduct records, and this share reaches more than 15 percent at some of the largest firms. Roughly one-third of advisers with misconduct are repeat offenders. Approximately half of advisers lose their jobs after misconduct. The labor market partially undoes firm-level discipline by rehiring such advisers. Firms that persistently engage in misconduct coexist with firms that have clean records. We show that this phenomenon may be explained by some firms “specializing” in misconduct and catering to unsophisticated consumers.

ABSTRACT The average FDIC loss from selling a failed bank is 28% of assets. We document that failed banks are predominantly sold to bidders within the same county, with similar assets business lines, when these bidders are well capitalized. Otherwise, they are acquired by less similar banks located further away. We interpret these facts within a model of auctions with budget constraints, in which poor capitalization of some potential acquirers drives a wedge between their willingness and ability to pay for failed banks. We document that this wedge drives misallocation, and partially explains the FDIC losses from failed bank sales.

We develop a conceptual framework and an empirical methodology to analyze the effect of rising interest rates on the value of U.S. bank assets and bank stability. We mark-to-market the value of banks’ assets due to interest rate increases from Q1 2022 to Q1 2023, revealing an average decline of 10 %, totaling about $2 trillion in aggregate. We present a model illustrating how asset value declines due to higher rates can lead to self-fulfilling solvency runs even when banks’ assets are fully liquid. Banks with high asset losses, low capital, and, critically, high uninsured leverage are most fragile. A case study of the failed Silicon Valley Bank confirms the model insights. Our empirical measures of bank fragility suggest that, in the absence of regulatory intervention, many U.S. banks would have been at risk of self-fulfilling solvency runs.

We empirically document two adjustment margins that are usually absent from the predominant “bank balance sheet lending” view of financial intermediation. For the shadow bank substitution margin, shadow banks substitute for traditional banks among loans that are easily sold. For the balance sheet retention margin, banks switch between balance sheet lending and selling loans based on their balance sheet strength. Estimates from a structural model show that these margins significantly shape policy responses, dampening the effect of capital requirements on lending whose costs are borne by wealthier borrowers. Secondary-market disruptions such as quantitative easing have significantly larger impacts on lending than capital requirements.

We find new facts that relate the evolution of firm scope to the changing frictions in external capital markets over the last three decades. We find that large, diversified publicly traded firms increase their scope during times of high external capital market frictions, such as in the recent Great Recession. Moreover, during these times firms diversify their investment needs and cash flow across industries. We also find similar phenomena outside diversified public firms. Examining the mergers and acquisitions activity of stand-alone and diversified private firms, we uncover similar patterns. In aggregate data, we find that the composition of mergers shifts from focused to diversifying and back with changes in external market conditions. Our evidence is broadly consistent with the notion that firms diversify their scope in response to tightening in external capital markets.