This paper examines the effect of a regulatory action (the Home Valuation Code of Conduct) that was designed to reduce the incidence of inflated collateral valuations. We identify the impact of the regulation using a difference-in-difference identification strategy. Our baseline results confirm that the regulation reduced inflated valuations in refinance transactions by 16% in the large lender sample, compared to small lenders and a placebo sample. The effect is most significant in low-liquidity and low-distress markets, but not in other markets. We find that the regulation had a significant impact on loan to value ratio and interest rate, and it also led to a significant increase in defaults but a decrease in prepayments.

The Self-Sufficiency Project (SSP) was a well-known welfare-to-work experiment that provided a generous but time-limited financial incentive to leave welfare and enter the workforce. Experimental evidence showed large short-term impacts but no lasting effects. We argue that these conclusions need to be reassessed. Policy changes implemented during the SSP implied that the control group’s behavior did not provide an appropriate counterfactual. We estimate the impacts the financial incentive would have had in an unchanging policy environment. This reassessment leads to significant changes in the lessons previously reached. Our study demonstrates that experimental findings need to be interpreted with care.

In this essay I discuss potential outcome and graphical approaches to causality, and their relevance for empirical work in economics. I review some of the work on directed acyclic graphs, including the recent The Book of Why (Pearl and Mackenzie 2018). I also discuss the potential outcome framework developed by Rubin and coauthors (e.g., Rubin 2006), building on work by Neyman (1990 [1923]). I then discuss the relative merits of these approaches for empirical work in economics, focusing on the questions each framework answers well, and why much of the the work in economics is closer in spirit to the potential outcome perspective.

Using a novel dataset on global private equity investments in 19 industries across 52 countries, we find that labor productivity, employment, profitability, and capital expenditures increase for publicly-listed companies in the same country and industry as private equity investments. Our results show that positive externalities created by private equity firms are absorbed by other companies within the same industry. Consistent with prior literature on competitive spillovers, these effects are more pronounced in country-industries with higher levels of competition, stronger institutions, and moderate levels of technological development suggesting that the competitive pressures from private equity-backed firms cause industry peers to react.

The purpose of this study is to provide empirical evidence on the links between currency and banking crises. Panel data probit and bivariate probit models are estimated to a sample of 21 developed and developing countries having monthly observations between the years 1985 and 2010. The findings indicate that banking crises precede currency crises, and vice versa. Currency crises also indirectly influence future banking crises probability through external shocks, liberalized financial markets, or highly-leveraged banking sectors. The study also finds evidence of contemporaneous correlation between the two crises. The results not only confirm the theoretical links between banking and currency crises, but also underline the importance of higher frequency data in analyzing the relationship between various financial crises.

We investigate claims made in Giacomini and White (2006) and Diebold (2015) regarding the asymptotic normality of a test of equal predictive ability. A counterexample is provided in which, instead, the test statistic diverges with probability 1 under the null.

This paper draws from the service science and professional service literatures to conceptualize financial auditing as an economic service. A central characteristic of economic services is the participation of the customer/client in the production process. The necessity of having the customer/client be a co-producer introduces greater heterogeneity to the provision of services relative to the manufacturing of goods which, in turn, creates a tension between service quality and service efficiency. One implication of this tension is that standardization of the audit process may not increase audit quality. We further argue that audit research should give more attention to the idiosyncratic nature of audit engagements and the importance of successful cooperation between the service provider (the audit firm) and the client for improving audit quality. Utilizing research on service networks, we draw attention to a broader perspective than the dyadic relations of service provider and client to show that the possible frictions between the value of co-creation of the service and the independence of the service professional are endemic to the service process, implying that efforts to maximize auditor independence may have unexpected costs that impair audit quality.

This study investigates the implications of cross-country differences in banking regulation and supervision for the international subsidiary locations and risk of U.S. bank holding companies (BHCs). We find that BHCs are more likely to operate subsidiaries in countries with weaker regulation and supervision and that such location decisions are associated with elevated BHC risk and higher contribution to systemic risk. The quality of BHCs’ internal controls and risk management plays an important role in these location choices and risk outcomes. Overall, our study suggests that U.S. banking organizations engage in cross-country regulatory arbitrage, with potentially adverse consequences.

Technological advances are creating a shift in the information disclosure environment allowing more investors to interact with management. We examine three key levels of trader‐management interaction to assess the accuracy of traders' market‐tested value estimates and resulting market price. These data require an engaging experiment and a complex, contextually rich asset, which we create by playing a popular gaming app before the experiment. Participants view financial information, ask management questions, estimate value, and trade. We find that receiving non‐personalized question responses improves trader estimates of value and market price efficiency relative to when traders ask questions but do not expect a response. This occurs because traders exert more effort estimating value and trading. However, receiving personalized versus non‐personalized responses harms value estimates and market efficiency. This occurs because traders receiving personalized responses fixate on the interaction with management, dividing their attention and diverting it away from valuing and trading the asset.

Responsive regulation (RR) theory posits that effective regulators enforce compliance by escalating penalties only if persuasion fails, otherwise risking formation of a culture of resentment. Using RR theory as a lens, we examine the interactions between large audit firms and the PCAOB during the initial years of PCAOB regulation, when annually-inspected auditors utilized negative tone within their inspection response letters to express public disagreement with their inspection reports. Consistent with our expectations, we find that negative tone within response letters is positively associated with (1) future Part I inspection findings that result in a restatement of a client’s financial statements and (2) the likelihood that Part II of a future inspection report will be publicly disclosed. We triangulate these results and the underlying theory in semi-structured interviews of eight PCAOB inspectors and six audit partners involved in these early interactions between the largest firms and the PCAOB. Consistent with RR theory, the PCAOB viewed public disagreement as indicators of noncompliance, incorporated public disagreement into subsequent inspections, and escalated penalties for noncompliance. Contrary to RR theory’s prescriptions, the PCAOB did not use persuasion as a first reaction to noncompliance. In response, the firms stopped publicly disagreeing, but may have formed a culture of resentment toward the PCAOB.