Knowledge that Transforms

This paper studies the long‐term consequences of actions induced by vesting equity, a measure of short‐term incentives. Vesting equity is positively associated with the probability of a firm repurchasing shares, the amount of shares repurchased, and the probability of the firm announcing a merger and acquisition (M&A). However, it is also associated with more negative long‐term returns over two to three years following repurchases and four years following M&A, as well as future M&A goodwill impairment. These results are inconsistent with CEOs buying underpriced stock or companies to maximize long‐run shareholder value, but consistent with these actions being used to boost the short‐term stock price and thus equity sale proceeds. CEOs sell their own stock shortly after using company money to buy the firm's stock, also inconsistent with repurchases being motivated by undervaluation.

We examine the relation between public firm presence and import competition. The information created by public firm presence may provide importers with insights they can use for competing with domestic firms. Consistent with this possibility, we document a positive relation between public firm presence and import competition. We find similar results when using differences in the expected costs of the Sarbanes‐Oxley Act as a source of plausibly exogenous variation in public firm presence after the act. We use differences in the proportion of German firms reporting publicly around a major enforcement reform as a natural mechanism experiment, and find evidence that financial reporting is a channel through which public firm presence relates to import competition. Additional mechanism tests and a falsification test estimated in the United Kingdom, where public and most private firms report publicly, further support this inference. In total, our evidence is consistent with foreign competitors using the information created by public firm presence, including what public firms disclose in financial reports, to compete with domestic firms. Consequently, our results provide evidence of competitors using the proprietary information disclosed in financial reports to compete with the disclosing firms and of information frictions affecting trade.

This paper studies the effects of managerial optimism on the optimal design of debt covenants. We find that managers who are more optimistic about the future success of their investment ideas provide lenders with greater control rights via tighter covenants. This is optimal for optimistic managers even though they understand that tighter covenants increase the probability of covenant violations and lead to excessive lender intervention. The broad reason for this result is that optimists wish to write contracts that repay lenders more frequently in bad states rather than in good states, and the only way to achieve this is by granting lenders more control rights. Our model generates new predictions and offers a novel explanation for the empirical evidence that covenants in debt contracts are set very tightly and are often violated.

As of November 2016, SEC Regulation (“Reg”) AB II requires issuers of certain types of asset‐backed securities (“ABS”) to disclose the credit‐risk attributes of each asset in the underlying pool, a substantial expansion of prior disclosure requirements. We examine how ABS issuers’ asset‐level disclosures under Reg AB II affect the (e)valuation of ABS by investors and credit rating agencies. Using difference‐in‐differences models that compare affected and unaffected types of ABS, we find that these disclosures improve the ability of initial ABS yields and credit ratings to predict the performance of the underlying assets. These results are concentrated in deals with above‐median risk layering in the underlying assets and complexity in the tranching of credit risk. We further find that asset‐level disclosures are associated with lower yields. Lastly, we provide evidence that most prospective ABS investors download asset‐level information during the price formation period prior to ABS issuance.

We examine the speed and mechanism of the price discovery process following earnings announcements in the after‐hours market, a very illiquid trading environment. Prices reflect earnings surprises mostly through changes in quotes rather than through trades. Following positive announcement surprises, ask prices adjust quickly while bid prices are slower to adjust, and vice versa for negative surprises. Returns computed from trade prices underestimate the speed and magnitude of price reactions following announcements relative to returns computed from quotes. These findings emphasize the importance of using quotes and not trade prices when examining intraday price discovery. Because firm announcements such as earnings generally occur in the after‐hours market, using quotes is crucial as trading is sparse. We further illustrate the importance of quotes when examining the price discovery process around analyst recommendation revisions.

We study what determines the involvement of component auditors in multinational enterprise (MNE) group audits and the association with audit quality and audit fees. Using unique Australian disclosures of group audit fees paid to the principal and component auditors, we first document that MNE complexity, MNE internationalization, and auditor characteristics are associated with component auditor involvement, and extent and type of component auditor involvement. Next, we find that involvement of component auditors benefits audit quality as long as the principal auditor conducts a substantial amount of work. Once the involvement of component auditors exceeds a certain level, audit quality decreases. We also document that audit fees are higher in the presence of a component auditor and increase with the extent of involvement, irrespective of component auditor type. Our results contribute to the emerging literature on group audits and provide empirical evidence on regulatory concerns about group audit quality.

We study the selection of Fellows of the Econometric Society, using a new data set of publications and citations for over 40,000 actively publishing economists since the early 1900s. Conditional on achievement, we document a large negative gap in the probability that women were selected as Fellows in the 1933–1979 period. This gap became positive (though not statistically significant) from 1980 to 2010, and in the past decade has become large and highly significant, with over a 100% increase in the probability of selection for female authors relative to males with similar publications and citations. The positive boost affects highly qualified female candidates (in the top 10% of authors) with no effect for the bottom 90%. Using nomination data for the past 30 years, we find a key proximate role for the Society's Nominating Committee in this shift. Since 2012, the Committee has had an explicit mandate to nominate highly qualified women, and its nominees enjoy above‐average election success (controlling for achievement). Looking beyond gender, we document similar shifts in the premium for geographic diversity: in the mid‐2000s, both the Fellows and the Nominating Committee became significantly more likely to nominate and elect candidates from outside the United States. Finally, we examine gender gaps in several other major awards for U.S. economists. We show that the gaps in the probability of selection of new fellows of the American Academy of Arts and Sciences and the National Academy of Sciences closely parallel those of the Econometric Society, with historically negative penalties for women turning to positive premiums in recent years.

This paper provides a general analysis of signaling under double‐crossing preferences with a continuum of types. There are natural economic environments where the indifference curves of two types cross twice, such that the celebrated single‐crossing property fails to hold. Equilibrium exhibits a threshold type below which types choose actions that are fully revealing and above which they pool in a pairwise fashion, with a gap separating the actions chosen by these two sets of types. The resulting signaling action is quasi‐concave in type. We also provide an algorithm to establish equilibrium existence by construction.

The public debate over disability insurance has centered on concerns about individuals without severe health conditions receiving benefits. We go beyond health risk alone to quantify the overall insurance value of U.S. disability programs, including value from insuring nonhealth risk. We find that disability recipients, especially those with less‐severe health conditions, are much more likely to have experienced a wide variety of nonhealth shocks than nonrecipients. Selection into disability receipt on the basis of nonhealth shocks is so strong among individuals with less‐severe health conditions that by many measures less‐severe recipients are worse off than more‐severe recipients. As a result, under baseline assumptions, benefits to less‐severe recipients have an annual surplus value (insurance benefit less efficiency cost) over cost‐equivalent tax cuts of $7700 per recipient, about three‐fourths that of benefits to more‐severe recipients ($9900). Insurance against nonhealth risk accounts for about one‐half of the value of U.S. disability programs.

We study firm responses to a large‐scale change in apprenticeship regulation in Colombia. The reform requires firms to train, setting apprentice quotas that vary discontinuously in firm size. We document strong heterogeneity in responses across sectors, where firms in sectors with high skill requirements tend to avoid training apprentices, while firms in low‐skill sectors seek apprentices. Guided by these reduced‐form findings, we structurally estimate firms' training costs. Especially in high‐skill sectors, many firms face large training costs, limiting their willingness to train apprentices. Yet, we find substantial overall benefits of expanding apprenticeship training, in particular when the supply of trained workers increases in general equilibrium. Finally, we show that counterfactual policies taking into account heterogeneity across sectors can deliver similar benefits from training while inducing less distortions in the firm‐size distribution and in the allocation of resources across sectors.