A cross-sectional analysis of cash compensation paid to CEOs of 713 US firms reveals that the sensitivity of compensation to earnings varies directly with earnings persistence. Additional analysis indicates that this sensitivity is greater for cases where executives are approaching retirement. Such evidence suggests the use of earnings persistence to counterbalance adverse consequences of earnings-based contracting with managers who face finite decision horizons.

This study tests predictions that pricing multiples on and incremental explanatory power of equity book value (net income) increase (decrease) as financial health decreases. Tests using a sample of 396 bankrupt firms and tests using a larger, pooled sample both yield inferences consistent with predictions. Findings are robust to inclusion of controls for industry, size, return-on-equity, and volatility of equity returns. Equity book value and net income multiples and incremental explanatory power vary predictably across three illustrative industries, selected based on the likely extent of unrecognized intangible assets.

This paper provides empirical evidence on the economic value of services provided by independent auditors by analyzing whether auditor association leads to reduced interest rates on revolving credit agreements. Using multivariate regressions, we analyze the relation between interest rates on revolving bank loans to small, private firms and the degree of auditor association with the financial statements provided to the lender,

The more liquid a firm's assets, the greater their value in a short-notice liquidation. It is generally thought that a firm should find it easier to raise external finance against more liquid assets. This paper focuses on the dark side of liquidity: greater asset liquidity reduces the firm's ability to commit to a specific course of action. As a result, greater asset liquidity can, in some circumstances, reduce the firm's capacity to raise external finance. Firms with “excessively” liquid assets are in the best position to finance illiquid projects. This leads us to a theory of financial intermediation and disintermediation based on the liquidity of assets.

Previous research finds the volatility implied by S&P 100 index option prices to be a biased and inefficient forecast of future volatility and to contain little or no incremental information beyond that in past realized volatility. In contrast, we find that implied volatility outperforms past volatility in forecasting future volatility and even subsumes the information content of past volatility in some of our specifications. Our results differ from previous studies because we use longer time series and nonoverlapping data. A regime shift around the October 1987 crash explains why implied volatility is more biased in previous work.

Using a market segmentation argument, this paper uses the interest rate derivative's arbitrage-free methodology to value both demand deposit liabilities and credit card loan balances in markets where deposits/loan rates may be determined under imperfect competition. In this context, these financial instruments are shown to be equivalent to a particular interest rate swap, where the principal depends on the past history of market rates. Solutions are obtained which are independent of any particular model for the evolution of the term structure of interest rates.

Transactions take place in the rm rather than in the market because the rm o ers agents who make speci c investments power. Past literature emphasizes the allocation of ownership as the primary mechanism by which the rm does this. Within the contractibility assumptions of this literature, we identify a potentially superior mechanism, the regulation of access to critical resources. Access can be better than ownership because: i) the power agents get from access is more contingent on them making the right investment; ii) ownership has adverse e ects on the incentive to specialize. The theory explains the importance of internal organization and third party ownership. A preliminary version of this paper circulated with the title \\Implicit Property Rights in a Theory of the

This paper investigates the effects of customer discrimination on the employment and earnings of minorities, particularly blacks. Data are used from a new survey of employers in four large metropolitan areas in the United States. Our results show that the racial composition of an establishment's customers has sizable effects on the race of who gets hired, particularly in jobs that involve direct contact with customers and in sales or service occupations. Race of customers also affects wages, with employees in establishments that have mostly black customers earning less than those in establishments with mostly white customers.

This study tests the competitive equilibrium predictions of a multi-period model of audit pricing and independence in two sets of laboratory markets: a control set consisting of human subjects in the role of auditors contracting with robot clients, and a treatment set in which both auditors and clients are human subjects. The results in all the control-set markets and some of the treatment markets support the predictions of "lowball" pricing and that heterogeneous beliefs among auditors regarding the treatment of a client-reporting issue is a necessary condition for independence impairment. By contrast, several treatment-set markets exhibit cooperative behavior between auditors and clients to achieve jointly beneficial outcomes. This behavior deviates from the price-independence relationship predicted in the competitive equilibrium, exhibiting instead a price-independence relationship that is characterized by an absence of lowballing and frequent independence impairment, even when auditors have homogeneous beliefs.