We analyze how firms renegotiate labor contracts to extract concessions from labor. While anecdotal evidence suggests that firms tend to renegotiate wages downward in times of financial distress, there is no empirical evidence that documents such renegotiation, its determinants, and its magnitude. This article attempts to fill this gap. Using a unique data set of airlines, which includes detailed information on wages and pension plans, we document an empirical link between airline financial distress, pension underfunding, and wage concessions.

This paper investigates the incentives of a regulator to close depository institutions, recognizing that an institution′s risk taking will be influenced by the regulator′s policy regarding bank closure and that there are opportunity costs in closing banks arising from their intermediation function. The regulator focuses not on the current portfolio of the bank, but on the bank′s future portfolio. Even if the regulator seeks to maximize welfare, the first best is not obtainable because the regulator is unable to credibly commit to certain policies regarding closure. Journal of Economic Literature Classification Numbers: G2, L5, G1.

This paper examines whether middle age American households purchase adequate amounts of life insurance. The analysis is based on SRI International's 1980, 1982, and 1984 surveys of the financial positions of American households. Our findings indicate that a significant minority of American wives are highly underinsured with respect to the possible deaths of their husbands. We find that 25 to 30% of wives are inadequately insured, by which we mean that they would suffer a loss in their rate of sustainable consumption of at least 30% in the event of being widowed. These findings on inadequate life insurance are even more striking if one focuses on those households in which over half of the couple's present expected value of resources is dependent on the husband's survival. The results of this paper together with those of the related literature strongly suggest that raising the share of social security benefits that are paid to surviving spouses as well as increasing employer-provided group life insurance could have a very considerable impact on the alleviation of poverty among widows, especially elderly widows.

We use data from aggregate stock and dividend futures markets to quantify how investors’ expectations about economic growth evolved across horizons following the outbreak of the novel coronavirus (COVID-19) and subsequent policy responses until July 2020. Dividend futures, which are claims to dividends on the aggregate stock market in a particular year, can be used to directly compute a lower bound on growth expectations across maturities or to estimate expected growth using a forecasting model. We show how the actual forecast and the bound evolve over time. As of July 20th, our forecast of annual growth in dividends points to a decline of 8% in both the United States and Japan and a 14% decline in the European Union compared to January 1. Our forecast of GDP growth points to a decline of 2% in the United States and Japan and 3% in the European Union. The lower bound on the change in expected dividends is -17% in the United States and Japan and -28% in the European Union at the 2-year horizon. News about U.S. monetary policy and the fiscal stimulus bill around March 24 boosted the stock market and long-term growth but did little to increase short-term growth expectations. Expected dividend growth has improved since April 1 in all geographies.

We study the workup protocol, an important size discovery mechanism in the U.S. Treasury market. We find that workup order flow shocks explain 6%–8% of the variation of returns on benchmark notes and, across maturities, 10% of the variation of the yield curve level factor. Information related to proprietary client order flow is more likely to show up in workup trades, whereas information derived from public announcements tends to come through preworkup trades. Our findings highlight how the nature of information affects the trade-off between speed and execution price when informed traders choose between the lit and workup channels. Received May 3, 2017; Editorial decision August 1, 2018 by Editor Thierry Foucault. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online. Internet Appendix tables are numbered with “IA” prefix.

Do stocks bear a crash risk premium? We examine the empirical performance of the tail index measure from Kelly and Jiang (2014). We find that the tail index explains the cross-section of the discount rate component of returns, but not the cash-flow component. Moreover, in the time series the tail index is uncorrelated with theoretically motivated measures of aggregate uncertainty and systemic risk. In contrast, the tail index Granger causes and is Granger caused by the level of the term structure, and the slope of the term structure Granger causes tail risk. Received June 22, 2016; editorial decision December 23, 2017 by Editor Raman Uppal.

Prime brokers play an important role in intermediating arbitrage capital to hedge funds. A fund’s peer-group ranking, relative to funds that share the same prime broker, significantly affects how investors respond to its past performance. I decompose the standard performance-flow relationship into two components: (1) flows that respond to overall performance rank, and (2) flows that respond to relative (within prime broker) performance rank. Strong relative rank drives fund in-flows, while poor overall rank drives out-flows. These results suggest that prime brokers intermediate about 40% of the standard performance-flow relationship.

Recently, calendar spread futures, futures contracts whose underlying asset is the difference of two futures contracts with different delivery dates, have been successfully introduced for a number of financial futures contracts traded on the Chicago Board of Trade. A spread futures contract is not an obvious financial innovation, as it is a derivative on a derivative security: a spread futures position can be replicated by taking positions in the two underlying futures contracts, both of which may already be quite liquid. This paper provides a motivation for this innovation, demonstrating how the introduction of spread futures can, by changing the relative trading patterns of hedgers and informed traders, affect equilibrium bid–ask spreads, improve hedger welfare, and potentially improve market-maker expected profits. These results are robust both to allowing serial correlation of asset price changes, and investor preference for skewness.

A model of asymmetric asset value information and nonverifiability of liquidation motives is developed to examine the optimal design and governance of asset-backed securities. Because of adverse selection risk, the liquidation option of whole loan sale results in external price discounting of composite cash flows. The alternative liquidation option of senior/subordinated security design is shown to dominate whole loan sale, since cash flow splitting allows the issuer to internalize some or all of the lemons-related liquidation costs. Security subordination levels must increase relative to full information levels, however, to protect uninformed outside investors. Pool diversification and loan bundling are shown to be packaging strategies that can soften the lemons-related subordination effect and therefore increase liquidation proceeds. With respect to security governance, we show that it is the junior securityholder who should control the debt renegotiation process with pooled debt structures. Better asset value information and a first loss position are the reasons for junior securityholder control in our model. Numerous empirical implications of the model are also identified and discussed.Journal of Economic LiteratureClassification Numbers: D46, D81, D82, G13, G21, G24, G32, G33.

When the managers of a firm are not its owners, agency problems result if managers take actions that maximize their own utility rather than the value of the firm. This paper investigates the existence of agency problems in mutual savings and loans. Using a more general approach than in previous studies, I show that mutual S&Ls were operating with an inefficient output mix while stock S&Ls were not, suggesting an agency problem among mutual S&Ls. The results cast doubt on a common argument that mutuals convert to stock S&Ls to capture economies of scale.