This paper examines whether firms are able to use acquisitions to ease their financial constraints. The results show that acquisitions do ease financing constraints for constrained acquirers. Relative to unconstrained acquirers, financially constrained firms are more likely to use undervalued equity to fund acquisitions and to target unconstrained and more liquid firms. Using a propensity score matched sample in a difference-in-difference framework, the results show that constrained acquirers become less constrained post-acquisition and relative to matched non-acquiring firms. This improvement is more pronounced for diversifying acquisitions and constrained firms that acquire rather than issue equity and retain the proceeds. Following acquisition, constrained acquirers raise more debt, increase investments, and reduce cash holdings relative to matched non-acquirers, consistent with experiencing reductions in financing constraints. These improvements are not seen for unconstrained acquirers. Finally, the familiar diversification discount is non-existent for financially constrained acquirers.

Introduction, 426. — I. The structure of the dual economy, 427. — II. Labor force growth and biased technological progress: comparative statics, 432. — III. Labor force growth and biased technological progress: dynamics, 435. — IV. A numerical experiment, 436. — V. Conclusion, 443. —Appendix A, 445. — Appendix B, 447.

A model of public and private liquidity integrates financial intermediation theory with a New Monetarist monetary framework. Non-passive fiscal policy and costs of operating a currency system imply that an optimal policy deviates from the Friedman rule. A liquidity trap can exist in equilibrium away from the Friedman rule, and there exists a permanent nonneutrality of money, driven by an illiquidity effect. Financial frictions can produce a financial-crisis phenomenon that can be mitigated by conventional open market operations working in an unconventional manner. Private asset purchases by the central bank are either irrelevant or they reallocate credit and redistribute income.

In this paper, a general-equilibrium business- cycle model is construct ed that, when subjected to real disturbances, mimics observed qualita tive comovements among real output, money, business failures, risk pr emia, intermediary loans, and prices. In contrast, monetary disturban ces generate cycles that have several inconsistencies with empirical evidence, thus providing support for real business-cycle theory at th e expense of monetary theories of the business cycle. Financial inter mediation arises endogenously in the model and intermediation matters for business-cycle behavior. A credit supply mechanism acts in tande m with an intertemporal substitution effect in propagating stochastic disturbances.

Implicit employment contracts are a common way to motivate firm productivity but also require that employees trust management to be fair when allocating postproduction firm resources between employees and owners. We use an experiment to study the problem of motivating firm productivity, which depends on levels of owner investment and employee productive effort, when managers have an incentive to favor the owner's interests over those of the employee. Drawing on research in psychology and behavioral economics, we argue that reputation concerns can more effectively promote firm productivity when manager compensation is relatively insensitive to how much the owner is allocated after production occurs. Consistent with our predictions, we find that reputation concerns lead to greater firm productivity and higher payoffs for all firm members, but only when manager pay is relatively insensitive to the owner's ex post allocation. In addition to offering testable empirical implications, our theory and results are important because they can help explain why executive compensation is, in practice, surprisingly insensitive to owner returns.

We examine a potential link between culture and financial development by considering culture's influence on contract enforcement regulation. Specifically, we investigate the role of individualism in determining the variation in enforcement costs across countries. Individualism positively and significantly relates to efficient contract enforcement, an association that is independent of a particular political system. Interaction effects, however, suggest that democracy magnifies individualism's influence on the contract enforcement efficiency. These results provide insight into how culture can shape financial outcomes. It further suggests that culture serves as a constraint on policymakers, as any given policy or formal institutional structure will function very differently depending on the cultural environment.

The economic impact of corporate self-dealing and the regulation against such activity both vary across countries. In this work, we examine the influence of trust on shareholder protection. We hypothesize that anonymous trust can affect self-dealing through two channels. First, trust may complement existing formal regulation. Alternatively, trust and formal regulation can act as substitutes. To test these hypotheses, we examine the association between a country's anti-self-dealing index and anonymous trust. We find that anonymous trust inversely relates to formal self-dealing regulation. We further find that anonymous trust positively relates to financial market development. Collectively, this evidence suggests that trust substitutes for formal self-dealing regulation, providing an alternative mechanism for shareholder protection.

Using industrial firms from the United States, Germany, and Japan, we examine the effect of bank power on cash holdings. We show that Japanese firms hold more cash than U.S. or German firms. We also document that Japanese cash balances are affected by the monopoly power of banks. During periods with powerful banks, firms’ high cash holdings are consistent with banks extracting rents. When banks weakened, Japanese cash levels became more like U.S. firms. We conclude that strong Japanese banks persuade firms to hold large cash balances. This is contrary to widely held beliefs about the Japanese governance system.