This paper studies the effect of board reforms on stock liquidity using data from 37 countries. We document that board reforms significantly increase stock liquidity: the effective spread on average decreases by 12.7% after a board reform. As information asymmetry is a key determinant of stock liquidity, we further find that board reforms decrease information asymmetry, and the treatment effect of board reforms on stock liquidity is stronger for firms with ex ante higher information asymmetry. Finally, board reforms facilitate healthy stock market development, with the effect being stronger for countries with lower aggregate stock market liquidity prior to reforms.

We study the agency implications of increased disclosure using a regulatory change in the mutual fund industry as an experimental setting. This quasi-natural experiment mandated more frequent portfolio disclosure, which we show imposes managerial skill-reassessment risks from investors on funds with high relative performance volatility. In turn, this risk translates into greater agency costs to investors. We show that high-volatility funds, relative to low-volatility funds, responded to the increased skill-reassessment risk after regulation with an increase in management fees and a decrease in risk taking. These actions get transmitted to fund investors in the form of inferior net performance

We develop an agency model in which managerial information manipulation creates pooling and entails ex post costs internal and/or external to the firm. We examine the implications of the strategic interactions between shareholders (who set internal governance and managerial incentive compensation), the manager (who exerts effort and reports on its outcome), and an external regulatory authority or RA (who investigates for fraud and levies penalties ex post). When the RA cannot pre-commit to an ex post investigation strategy, a fraudulent equilibrium obtains if the firm's internal governance costs are sufficiently high. Consistent with (so far fairly scant) post-SOX empirical evidence, but the opposite of the implications of signal-jamming models and equilibria with pre-commitment, the model implies an increase in minimum internal governance standards or ex post fraud penalties (as with SOX) results in decreased equilibrium pay-for-performance sensitivity and firm performance.

We examine the effects of regulations designed to address the potential conflict of interest that arises when sell-side analyst research is not independent of investment banking. We focus on two types of regulation: (1) internal barriers between equity research and investment banking that restrict communication; and (2) disclosure requirements relating to analyst compensation. We find that information barriers can increase research effort and improve report quality by limiting an investment bank's ability to distort its analyst's incentives. However, this type of regulation can also reduce information production and lower the quality of reports if an investment bank benefits directly from research activity. Disclosure requirements, on the other hand, unambiguously lead to more informative prices and a higher report quality relative to either information barriers or no regulation

We analyze the limits of regulating bank CEO compensation to reduce risk shifting in the presence of an active board that retains the right to approve new investment strategies. Compensation regulation prevents overinvestment in strategies that increase risk, but it is ineffective in preventing underinvestment in strategies that reduce risk. The regulator optimally combines compensation and capital regulations. In contrast, if the board delegates the choice of strategy to the CEO, compensation regulation is sufficient to prevent both types of risk shifting. Compensation regulation increases shareholders’ incentives to implement an active board, which reduces the effectiveness of compensation regulation

Although many studies show that the presence of institutional investors facilitates the incorporation of accounting information into financial markets, the evidence of informed trading by institutions is rather limited in the extant literature. We address these inconsistent findings by proposing PC _ NII , percentage changes in the number of a stock's institutional investors, as a novel informed trading measure. PC _ NII is better able to detect informed trading than are changes in institutional ownership ( Δ IO )—the measure commonly used in previous studies—because (i) entries and exits are usually triggered by substantive private information and (ii) only a small fraction of institutions have superior information. As conjectured, PC _ NII subsumes the information content of Δ IO and other institutional trading and herding measures in the forecast of stock returns, and its strong predictive power for stock returns reflects mainly its close correlation with future earnings surprises. We also show that PC _ NII helps address empirical issues that require a reliable measure of institutional informed trading.

This paper models inside trading regulation with a well-defined objective and introduces an explicit measure of regulatory strictness. The regulator's objective is to minimize the trading loss of liquidity traders. With market professionals whose information-based trading is not regulated, the objective of regulation can be achieved by promoting competition between these market professionals and the insider. When stricter regulation induces improvement in the precision of the market professionals' information, tolerating some insider trading can be the optimal regulatory policy. It is also shown that allowing more market professionals to enter the market and disclosing information to them are as effective in achieving the regulatory objective as the direct restriction of insider trading.Journal of Economic LiteratureClassification Numbers: D82, G10, L13

This article studies whether knowledge protection affects shareholder value and firms’ investment in knowledge assets using the staggered adoptions and rejections of the inevitable disclosure doctrine (IDD) by U.S. state courts as exogenous changes in the level of knowledge protection. We find positive (negative) abnormal stock returns around the IDD adoption (rejection) day for firms headquartered in the state, and we uncover a positive IDD treatment effect on firms’ investment in knowledge assets. Moreover, the effects on stock returns and knowledge assets investment are stronger in more knowledge-oriented industries and firms. Finally, enhancing knowledge protection does not discourage local entrepreneurial activity.

Banks take costly actions (such as capitalization, liquidity holding, and advanced risk management) to avoid financial distress and creditor runs. While directly affecting a bank’s risks, such actions can also signal the bank’s fundamentals. We show that prudential regulations have an informational impact: sufficiently tight regulations can eliminate inefficient separating equilibria in banks’ signaling game, thereby changing the information available to creditors and their incentives to run. When accounting for this informational impact, tightening regulations can improve banks’ payoffs and be considered bank incentive-compatible. We support this novel, information-based rationale for regulations with evidence from the US liquidity requirement