Compensation committees face special difficulties when setting pay in the last years of a CEO's tenure. For example, incentives to manipulate earnings for the purpose of enhancing earnings-based compensation are greater in CEOs' terminal years. We predict that compensation committees are aware of these incentives and adjust the relative weights placed on earnings components in the cash compensation function to mitigate the problem. Consistent with our prediction, we find that in CEOs' terminal years, positive changes in discretionary accruals receive significantly less weight than other income components in determining cash compensation. This provides new evidence that not all gains flow through to compensation. We also find that in non-terminal years, managers' compensation is partially shielded from the negative effects of selling, general, and administrative expenditures (SG&A), but this effect reverses in the terminal period, consistent with the compensation committee discouraging investment in legacy assets by outgoing CEOs. Overall, our findings suggest that compensation committees treat components of earnings differently when setting pay in the terminal period.

We examine the implications of special purpose acquisition companies (SPACs) in South Korea, where sponsor contracts are better aligned than in the U.S. Unlike in U.S. where SPAC targets (de-SPACs)' post-merger prices generally fall below the SPAC IPO offer price due to distorted incentives of the SPAC sponsors, Korean de-SPACs' prices tend to remain above the initial SPAC price. The better alignment of incentives results in positive or at least non-negative average buy-and-hold returns and excess portfolio returns in Korean de-SPACs, which contrast with the negative long-run performance observed in the U.S. Korean de-SPACs also increase investment more than matched private firms following the listing. Overall, our results suggest that better aligned sponsor contracts may incentivize sponsors to target high-quality firms, enhancing post-merger performance.

We document a systematic seasonal component in the aggregate underperformance of active mutual funds. At the aggregate level, active funds underperform the market and other passive benchmarks only in the first month of a quarter. This intra-quarter performance seasonality holds across fund sizes and investment styles. The pattern is consistent with short-term stock return reversal effects along with aggregate window-dressing and, to a lesser extent, NAV-inflation practices around quarter-ends. We find marginal or no evidence of microstructure biases, fund investor flows, or cash distributions as sources of this seasonality. Our findings highlight new features of the active management underperformance puzzle.

We identify exposure to political risk by exploiting a unique variation around land lease extension protection after 2047 in Hong Kong’s housing market due to historical arrangements. Relative to properties that have been promised an extension protection, those with unprotected leases granted by the current government are sold at a discount of 8 percent; those with colonial leases suffer an additional discount of 8 percent. Incorporating estimated structural parameters that suggest an additional 20 percent ground rent after 2047, our model matches empirical discounts well across lease horizons. Discounts increase over time, particularly in areas with greater pessimism about the city’s future.

Exploiting variation in the timing of resets of adjustable-rate mortgages (ARMs), we find that a sizable decline in mortgage payments (up to 50 percent) induces a significant increase in car purchases (up to 35 percent). This effect is attenuated by voluntary deleveraging. Borrowers with lower incomes and housing wealth have significantly higher marginal propensity to consume. Areas with a larger share of ARMs were more responsive to lower interest rates and saw a relative decline in defaults and an increase in house prices, car purchases, and employment. Household balance sheets and mortgage contract rigidity are important for monetary policy pass-through.

We develop a continuous-time asset allocation model to investigate the effects of mean-reverting stock returns on investors with Prospect Theory (PT) preferences. Our semi-analytical solution facilitates a comprehensive exploration of how the stock investment of PT investors may differ when accounting for mean reversion. We find that incorporating mean reversion attenuates the distinct V-shaped demand pattern in relation to contemporaneous prices, which is more pronounced when mean reversion is absent, by significantly reducing PT investors’ stock demand following price increases. This shift leads to a stock demand profile that demonstrates an inverse relationship with stock prices. In line with this change, we also show that combining PT utility with mean reversion predicts short-term contrarian behavior and the disposition effect more reliably than benchmark models that incorporate either PT utility or mean-reverting returns alone.