Abstract Some market crashes occur because of significant imbalances in demand and supply. Conventional models fail to explain the large magnitudes of price declines. We propose a unified structural framework for explaining crashes, based on the insights of market microstructure invariance. A proper adjustment for differences in business time across markets leads to predictions which are different from conventional wisdom and consistent with observed price changes during the 1987 market crash and the 2008 sales by Société Générale. Somewhat larger-than-predicted price drops during 1987 and 2010 flash crashes may have been exacerbated by too rapid selling. Somewhat smaller-than-predicted price decline during the 1929 crash may be due to slower selling and perhaps better resiliency of less integrated markets.

Abstract Utilizing transaction-level financial data, we explore how household consumption responded to the onset of the COVID-19 pandemic. As case numbers grew and cities and states enacted shelter-in-place orders, Americans began to radically alter their typical spending across a number of major categories. In the first half of March 2020, individuals increased total spending by over 40% across a wide range of categories. This was followed by a decrease in overall spending of 25%–30% during the second half of March coinciding with the disease spreading, with only food delivery and grocery spending as major exceptions to the decline. Spending responded most strongly in states with active shelter-in-place orders, though individuals in all states had sizable responses. We find few differences across individuals with differing political beliefs, but households with children or low levels of liquidity saw the largest declines in spending during the latter part of March.

Abstract Previous studies have identified several variables that would have predicted future stock returns, though other studies suggest these results may be due to data snooping. To guard against data snooping, researchers have suggested use of Bayesian model averaging (BMA) to account for the uncertainty about prediction models. In common with other researchers, I find evidence of predictability during time periods when a hypothetical investor uses BMA with no restrictions on what variables may be included in the model. However, when the hypothetical investor is limited to using only variables whose predictive ability would have been known at the time of the forecast, predictability disappears. Moreover, predictability also disappears when data are updated through 2010, even without constraints on variable use. The results cast doubt on whether stock returns were ever predictable in real time and also suggest that returns may no longer be predictable even if real-time constraints are removed.

Financial and real investment flexibility, tax competition, and superior economic information by transnationals both create a rationale for corporate income taxation and limit the effectiveness of such taxation. While these factors have led to a variety of transnational tax policies, such as deferral, double taxation, apportionment, and trade rules, very few of these institutional features have been integrated into tax competition and agency models. In this paper, I show how the integration of investment flexibility, tax competition, and agency issues is crucial to our understanding of corporate tax policies.

Abstract We examine the impact of auditors’ reputation impairments on their private-client market share to explore how conducting low-quality audits affects auditors’ broader client portfolios. Prior evidence implies that an audit office loses public-client market share after a client announces a restatement. However, auditors’ private clients may be less concerned about auditor reputation and quality, given that they have lower agency costs and their financial statement users are often creditors that can rely on direct monitoring to narrow information asymmetry. Also, differences between public and private company audits cast doubt on whether public-client restatements are relevant to private clients. We find that the private-client market share of a Big Four audit office falls by, on average, 5 percent the year after a public client announces a restatement. This evidence suggests that Big Four offices cannot simply replace lost public-client revenue with private-client revenue after suffering reputation damage.

Abstract We document that defined benefit pension plans with significant holdings in private equity (PE) earn substantially greater returns than plans with small holdings, in both the 1990s and the 2000s. A one standard deviation increase in PE holdings is associated with 4% greater returns per year. Up to one-third of this outperformance comes from lower costs that we link to economizing on costly intermediation by avoiding fund-of-funds and investing directly. The bulk of the outperformance comes from superior gross returns only partially explained by access and experience. We conjecture that larger PE investors have superior due diligence and ability to bridge information asymmetries in PE.

Abstract This paper uses style analysis to investigate whether Euro-zone equity returns are driven by country or industry effects over the 1990–2008 period. We find that before the introduction of the Euro, country effects dominate, while industry effects prevail after 1999. This reversal is driven mainly by the countries that were least integrated in the Economic and Monetary Union (EMU) and world markets in the early 1990s and for which the EMU convergence process led to rapid strengthening of linkages with the core Euro-zone. For markets with stronger economic linkages, industry effects dominate both before and after the introduction of the Euro.