The risk and return trade‐off, the cornerstone of modern asset pricing theory, is often of the wrong sign. Our explanation is that high‐beta assets are prone to speculative overpricing. When investors disagree about the stock market's prospects, high‐beta assets are more sensitive to this aggregate disagreement, experience greater divergence of opinion about their payoffs, and are overpriced due to short‐sales constraints. When aggregate disagreement is low, the Security Market Line is upward‐sloping due to risk‐sharing. When it is high, expected returns can actually decrease with beta. We confirm our theory using a measure of disagreement about stock market earnings.

This study investigates how the use of debt covenants around the world varies with legal institutions. On the basis of syndicated loans in 36 countries, we find that debt covenants are more prevalent in countries with stronger law enforcement and weaker creditor rights, suggesting that law enforcement facilitates, and creditor rights substitute for, the use of covenants. We also find that the substitution effect between covenant use and creditor rights exists mainly in countries with strong law enforcement, and the effect of legal institutions on covenants is primarily driven by covenants that preserve seniority and capital. In addition, timely loss recognition increases with the use of debt covenants and strong creditor rights attenuate this relation. Overall, our study is the first to provide comprehensive evidence on how the use of debt covenants responds to legal institutions and how it bridges the previously documented link between legal institutions and accounting conservatism.

Firms with a concentrated corporate customer base need to hold more cash and have a stronger incentive to manage earnings upwards. Since tax planning can increase both cash flow and accounting earnings, firms with a concentrated customer base may be more likely to engage in tax avoidance. We find evidence of a positive association between the level of corporate customer concentration and the extent of tax avoidance. In addition, we find that the positive relation between corporate customer concentration and tax avoidance is more pronounced when a firm has a lower Market Share in its industry, enjoys less revenue diversification, and engages less in real earnings management. In contrast to corporate major customers, governmental major customers provide stable cash flow to suppliers, which is likely to alleviate supplier firms’ need for tax avoidance. We find that firms engage in lower levels of tax avoidance when they have a governmental major customer, and that this association is less pronounced under Democratic presidencies. Taken together, our findings indicate that a firm's customer concentration (i.e., corporate and governmental major customers) has a significant effect on the extent to which it avoids taxes.