We derive a model with qualitative implications for options pricing under counterparty credit risk and provide empirical evidence using the data from the Hong Kong derivatives market during 2005–2014. We find that the log-price difference between a derivative warrant with counterparty credit risk and an otherwise identical option without counterparty credit risk is significantly and negatively associated with the credit default swap spread on the warrant issuer. We also find that the prices of out-of-the-money put warrants are more sensitive to credit risk than those of other warrants. Our results show counterparty credit risk matters for derivative pricing.

Affine jump-diffusion models have been the mainstream in options pricing because of their analytical tractability. Popular affine jump-diffusion models, however, are still unsatisfactory in describing the options data and the problem is often attributed to the diffusion term of the unobserved state variables. Using prices of variance-swaps (i.e., squared VIX) implied from options prices, we provide fresh evidence regarding the misspecification of affine jump-diffusion models, as variance-swap prices are affine functions of the state variables in a broader class of models that do not restrict the diffusion term of the state variables. We apply the nonparametric methodology used by Aït-Sahalia (1996b), supplemented with bootstrap tests and other parametric tests, to the S&P 500 index options data from January 1996 to September 2008. We find that, while the affine diffusion term of the state variables may contribute to the misspecification as the literature has suggested, the affine drift of the state variables, jump intensities, and risk premiums are also sources of misspecification.

This article studies how the three-way interaction among shareholders, creditors, and managers shapes firms’ executive compensation. Firms with a higher ownership share by “dual holders”—institutional investors that simultaneously hold equity and bond of the company—adopt a less risk-inducing compensation structure: less stock options and more inside debt. Exploiting financial institution mergers that increase or decrease dual ownership for portfolio companies, we identify a causal link between dual ownership and CEO compensation policies. Mutual fund proxy voting data suggest that shareholder voting is an important channel for dual holders to implement less convex contracts.

We examine the impact of technological competition on voluntary innovation disclosure around the enactment of the Leahy–Smith America Invents Act of 2011 (“AIA”). The AIA moves the US patent system from the first‐to‐invent to first‐inventor‐to‐file system and induces a patent race that increases technological competition. Firms that are slow to file a patent are disadvantaged in this race. We find that focal firms with lagging patent classes strategically increase scientific publications in their lagging technology areas in an attempt to block competitors from obtaining a patent. This effect is more pronounced in technology areas where the firm has better information about their relative competitive position (proxied by greater inventor mobility), in technology classes with constraints on increasing patent filing timeliness (proxied by fewer experienced attorneys), and areas characterized by more intense competition. We find that the peers of firms with lagging classes experience greater patent filing rejections for lack of novelty and obviousness reasons after the AIA, suggesting that strategic scientific disclosure is effective.

Political identity and partisanship are salient features of today's society. Using deeds records and voter rolls, we show that current residents are more likely to sell their homes when opposite‐party neighbors move in nearby than when unaffiliated or same‐party neighbors do. This is especially true when the new neighbors are politically active, consistent with an animosity between parties mechanism. We conclude that affective polarization is not limited to purely political settings and affects one of the household's most important financial decisions, their home transactions.

We show that firms collect almost 70% of their cash flows in the second half of the fiscal year, and that firms that collect more cash by year-end earn a 6.8% higher per annum risk premium and save more cash. We rationalize these facts in a quantitative investment-based asset pricing model. Immediate cash payments negatively affect profitability, but reduce equity financing costs by increasing information transparency. Financially constrained firms optimally collect more cash at year-end when firms’ performance attracts more attention and information transparency is more valuable. Such behavior further results in greater exposure to aggregate productivity and financial shocks.

Using a large sample of U.S. firms for the period 1995–2008, we provide strong and robust evidence that corporate tax avoidance is positively associated with firm-specific stock price crash risk. This finding is consistent with the following view: Tax avoidance facilitates managerial rent extraction and bad news hoarding activities for extended periods by providing tools, masks, and justifications for these opportunistic behaviors. The hoarding and accumulation of bad news for extended periods lead to stock price crashes when the accumulated hidden bad news crosses a tipping point, and thus comes out all at once. Moreover, we show that the positive relation between tax avoidance and crash risk is attenuated when firms have strong external monitoring mechanisms such as high institutional ownership, high analyst coverage, and greater takeover threat from corporate control markets.

Using a large sample of U.S. firms for the period 1993–2009, we provide evidence that the sensitivity of a chief financial officer's (CFO) option portfolio value to stock price is significantly and positively related to the firm's future stock price crash risk. In contrast, we find only weak evidence of the positive impact of chief executive officer option sensitivity on crash risk. Finally, we find that the link between CFO option sensitivity and crash risk is more pronounced for firms in non-competitive industries and those with a high level of financial leverage.