In this article, I use the principal‐agent framework to examine the incentives of risk‐and work‐averse agents to work on projects that are long‐term, multistage, and subject to abandonment. Periodic applications of effort by the agent are required. The agent also obtains private information as the project evolves, and he decides whether the project should be abandoned or continued. The principal not only seeks to provide incentives to induce the agent to take up such risky investments and work hard at them, but also seeks to provide incentives for the agent to abandon the project if the profit prospect is low. We show that the agent's decision to continue is not always aligned with the principal's desire. The result provides an economic rationale for the sunk cost phenomenon. There also exist conditions under which the agent chooses to prematurely abandon the project.

Data-driven lending relies on the calibration of models using training periods. We find that this type of lending is not resilient in the presence of economic conditions that are materially different from those experienced during the training period. Using data from a small business fintech lending platform, we document that the small business credit supply collapsed during the COVID-19 crisis of March 2020 even though the demand for loans doubled relative to pre-pandemic levels. As the month progressed, most lenders significantly reduced or halted their lending activities, likely due to the heightened risk of model miscalibration under the new economic conditions.

We analyze how firm-level shocks to collateral values influence employment outcomes among US corporations. Using comprehensive employment data from the US Census Bureau, we estimate that employment expenditures increase by $0.10 per $1 increase in firms’ real estate collateral values. These effects are stronger among financially constrained firms, and additional hiring is funded through debt issuance, consistent with a collateral channel. This relation holds among firms in tradable goods sectors, alleviating concerns about local demand shocks. Thus, through a collateral lending channel, fluctuations in the US commercial real estate market are an important driver of corporate labor demand.

This paper examines empirically the announcement effect of commercial corporate governance ratings on share returns. Rating downgrades by Institutional Shareholder Services (ISS) are associated with negative returns of –1.14% over a 3-day announcement window. The returns are highly correlated with the proprietary analysis of ISS and are decreasing in agency costs, consistent with ratings providing independent information on underlying corporate governance quality. We thus show that the influence and impact of ISS extends beyond proxy recommendations and subsequent voting outcomes. Our findings contrast with the insignificant price impact of Daines, Gow, and Larcker (2010), whose analysis we replicate and successfully reconcile to ours by pooling upgrades and downgrades together.

The stocks in a momentum portfolio, which contribute to momentum profits, do not experience significant subsequent reversals. Conversely, stocks that do not contribute to momentum profits over the intermediate horizon exhibit subsequent reversals. Merging these separate securities into a single portfolio causes momentum and reversal patterns to appear linked. Stocks with momentum can be separated from those that exhibit reversal by sorting on size and book-to-market equity ratio. Controlling for proxies for behavioral biases, market illiquidity, and macroeconomic factors does not affect our results.

This paper considers share repurchases as the way long-term shareholders preserve their ability to use corporate information for speculative purposes when insider trading regulation is enforced. This use of corporate information increases the adverse selection losses of short-term shareholders. Thus, buy-back programs reduce their incentive to invest in stocks that back the most productive technology, leading to a socially inefficient equilibrium. It follows that insider trading should not be banned when share repurchases are allowed. More generally, the paper argues that the regulation of insider trading and repurchases can not be considered in isolation, and analyzes their interplay.

We derive equilibrium restrictions on the range of the transaction prices of American options on the stock market index and index futures. Trading over the lifetime of the options is accounted for, in contrast to earlier single-period results. The bounds on the reservation purchase price of American puts and the reservation write price of American calls are tight. We allow the market to be incomplete and imperfect due to the presence of proportional transaction costs in trading the underlying security and due to bid-ask spreads in option prices. The bounds may be derived for any given probability distribution of the return of the underlying security and admit price jumps and stochastic volatility. We assume that at least some of the traders maximize a time- separable utility function. The bounds are derived by applying the weak notion of stochastic dominance and are independent of a trader's particular utility function and initial portfolio position.

We investigate whether a firm’s directors’ and officers’ liability insurance contract at the time of the IPO is related to insured firms’ first year post-IPO performance. We find that insurers charge a higher premium per dollar of coverage to protect the directors and officers of firms that will subsequently have poor first year post-IPO stock performance. A higher price of coverage is also associated with a higher post-IPO volatility and lower Sharpe ratio. Our results are robust to various econometric specifications and suggest that even when the high level of information asymmetry inherent to the IPO context prevails, insurers have information about the firms’ prospects that should be valuable to outside investors.