Using a dynamic selection model, we obtain consistent and unbiased estimates of risk and returns for infrequently traded bonds and conduct the first comprehensive asset pricing test of municipal bonds using the multifactor approach. Correction for sample selection and infrequent trading problems results in substantially higher beta estimates. Besides conventional risk factors, illiquidity and taxes are important for the pricing of municipal bonds. Importantly, bond returns contain a significant liquidity risk premium. Failing to account for sample selection bias leads to erroneous inference on the magnitude of systematic risk and substantial underestimation of risk premiums.

We revisit the question of why shifts in aggregate demand drive business cycles. Our theory combines intertemporal substitution in production with rational confusion, or bounded rationality, in consumption and investment. The first element allows aggregate supply to respond to shifts in aggregate demand without nominal rigidity. The second introduces a “confidence multiplier,” that is, a positive feedback loop between real economic activity, consumer expectations of permanent income, and investor expectations of returns. This mechanism amplifies the business-cycle fluctuations triggered by demand shocks (but not necessarily those triggered by supply shocks); it helps investment to comove with consumption; and it allows front-loaded fiscal stimuli to crowd in private spending.

We construct a new measure of deposit insurance generosity for many countries, empirically model the exogenous international influences on the adoption and generosity of deposit insurance and use a novel econometric method to explore the causal chain from the expansion of deposit insurance generosity to increased overall lending, increased lending to households, increased banking system leverage, and more severe and frequent banking crises. Greater deposit insurance generosity robustly produces greater overall lending relative to bank assets and more lending to households relative to both bank assets and GDP, and results in higher banking system leverage. Our estimates, however, are not conclusive regarding whether greater deposit insurance generosity resulted in greater total loans relative to GDP or in more frequent or severe banking crises.

We investigate theoretically the effect of firm opacity, the degree of information asymmetry between firms and outside investors, on whether Corporate Social Responsibility (CSR) activities signal firm value. In our model, a profit-maximizing firm chooses whether to conduct costly CSR activities observable to potential investors and whether to undertake internal corporate and managerial actions that improve its value, which is unobservable to potential investors. We show that the firm is more likely to perform CSR when it undertakes the value-enhancing internal actions in equilibrium, and hence, CSR signals the firm’s value and increases investors’ expected valuation of the shares, only when the firm is moderately opaque. Empirical implications regarding the effect of firm opacity on the correlation between CSR and firm value are discussed.

This study examines whether the labor market rewards directors for individual excellence. We use national director awards to capture large, positive shocks to individual reputation. We find strong evidence that the labor market recognizes and rewards “superstar” directors. Award events lead to positive announcement returns and increase awardees’ chances of gaining new board seats at prestigious firms. Consistent with theories of career concerns and labor market signaling, the reputational effects are greater for younger directors and for nonoverboarded directors. Overall, our findings offer new insights into the nature of reputation and rewards in the upper echelon of the director labor market. (JEL G30, G34, G39) Received August 15, 2020; editorial decision May 11, 2021 by Editor Andrew Ellul.

This paper examines the effects of the abandonment of China’s Grand Canal—the world’s largest and oldest artificial waterway—which served as a disruption to regional trade access. Using an original dataset covering 575 counties over 262 years, we show that the canal’s abandonment contributed to the social turmoil that engulfed North China in the nineteenth century. Counties along the canal experienced an additional 117 percent increase in rebelliousness after the canal’s closure relative to their non-canal counterparts. Our findings highlight the important role that continued access to trade routes plays in reducing conflict.

We examine the role and economic consequences of emotions in shaping the judgment of corporate executives. Analyzing a large sample of U.S. public firms, we find that sunshine-induced good mood leads managers to make upwardly biased earnings forecasts. Importantly, our evidence implies that managers become less susceptible to the sunshine priming effect in unambiguous settings, when their forecasts are subject to stricter external monitoring, and when they have stronger incentives to issue accurate forecasts. Additional tests show that equity market participants discern less informative signals from forecasts influenced by sunshine and that managers prone to the sunshine priming effect impose costs on their firms in the form of higher information risk and equity financing costs. Reflecting that labor markets also play a disciplinary role, we find that mood-prone managers suffer adverse career outcomes. We provide the first large-scale analysis on the nuanced ways in which emotions affect top executives.

We examine whether investors consider foreign component auditors when assessing the value of U.S. multinational corporations (MNCs) using two sets of Public Company Accounting Oversight Board (PCAOB) international regulatory events. We find investors react negatively when the PCAOB is denied access to inspect foreign component auditors in jurisdictions where a U.S. MNC has significant operations and positively when those countries later allow inspection. For foreign component auditors that are inspected, we find investors react positively when they receive clean inspection reports and negatively when they fail to remediate quality control deficiencies. Consistent with PCAOB international oversight providing additional assurance about foreign component auditor quality, our collective results indicate investors consider foreign component auditors when valuing U.S. MNCs.

We investigate variation in information production by sell‐side analysts and its potential role in hedge fund activist intervention, an important external corporate governance mechanism that creates shareholder value. Using textual analysis to derive an activism dictionary from intervention objectives and tactics, we find substantially more activism content in pre‐intervention analyst reports of target firms than propensity score matched control firms. Activism content is associated with more detailed reports containing more quantitative information. Target firm intervention‐date stock returns are significantly higher when activist intention (13D) filings are supported by reports with more general and objective‐specific activism content. Of activists' public letters to stakeholders, 31.9% directly mention sell‐side analysis, amplifying the association between target returns and analyst report information. The relationship between analyst information and activism returns is robust to using brokerage closures as an exogenous shock and is consistent with analyst incentives. Activist funds with no prior disclosed position in target firms and more experienced funds capture higher returns from sell‐side information. Overall, our results suggest sell‐side analysts play a significant informational role in supporting hedge fund activism.

We find that suppliers are more likely to redact mandated disclosures when major customers have proprietary information to protect (in the form of R&D intensity, trade secrets, and nondisclosure agreements), controlling for suppliers' own proprietary cost concerns. Furthermore, the effect on suppliers' redactions is concentrated in subsamples for which customers have greater power, measured by customer size, industry leadership, and the number of suppliers. Additionally, suppliers also curtail operations-related disclosures in the management discussion and analysis (MD&A) and product- and service-related press releases when customers likely have proprietary information to protect. Overall, these findings suggest that dependent suppliers internalize their customers' disclosure incentives and curtail disclosures, catering to customers’ demand for information protection.