In financial stability, it is essential to know the determinants of interest rates in interbank markets because they are important vehicles for liquidity allocation among banks and are relevant for monetary policy transmission. Recent research indicates that banks with excess liquidity exercise their market power by rationing liquidity during periods of financial stress. This confirms the value of knowing the banks connections and identifying liquidity spreaders in such markets to manage contagion risk, liquidity hoarding and to preserve financial stability. In addition to well studied bank features such as size, liquidity and credit risk, we study which network metrics relate to interest rates during different periods. Using transaction level data on unsecured and secured lending, we apply an approach that employs network theory, econometric models and machine learning to analyze the structural properties of the secured and unsecured interbank markets in Mexico. Our findings support the “too-interconnected-to-fail” hypothesis. In the secured interbank market, PageRank shows a relationship with interest rates, while metrics associated with the notion of influence and systemic risk (Katz and DebtRank) are relevant in the unsecured interbank market. In general, a bank with high centrality lends at higher rates and gets funding at lower rates.

Abstract Bloom et al. (2016) find that Chinese import competition induced a rise in patenting, IT adoption, and total factor productivity (TFP) by up to 30% of the total increase in Europe in the late 1990s and early 2000s. We uncover several coding errors in an important robustness check of their patent results. When corrected, we find no statistically significant relationship between Chinese competition and patents. Other specifications in the original paper use a problematic $ \log(1+\rm patents) $ transformation. This normalization induces bias given low average patent counts for firms in China-competing sectors and rapidly declining patents across the sample.

We compare CRSP dividend data to data from firms' financial statements in the SEC's EDGAR database. Data screens typically used in the extant literature produce a sample in which about half of the apparent reductions in dividends per share are not actually dividend cuts. Many of the fictitious cuts are due to CRSP misclassifying special dividends as regular dividends. We demonstrate that the fictitious cuts can affect point estimates and inferences in studies of the information content of dividends. We provide a simple filter that eliminates most of the fictitious cuts in our sample – remove dividend cuts from the sample that are preceded by a dividend increase in the prior quarter. This filter produces empirical results that are similar to our sample of true cuts.

Variance risk premia (VRP) based on equity and credit market information for the same firm differ substantially in magnitude. VRP is strongly dependent on firm characteristics. Higher-leveraged and larger firms have lower VRP. The smirk in the plot of VRP vs. leverage is higher for low-levered firms than for high-levered firms. This smirk is more pronounced in the credit market than in the equity market. VRP, and especially credit VRP, correlates with higher future returns and is a priced source of risk in both markets.

ABSTRACT How can features of the markets for audit and nonaudit services (NAS) affect an audit firm's incentives to invest in audit quality, average audit quality, and social welfare? We address these questions in a model focusing on competition in both audit and NAS markets. We show that, when audit and NAS demand are positively correlated, prohibiting auditors from providing NAS to audit clients leads to higher investments in audit quality, but can decrease average audit quality if marginal clients switch to lower quality auditors. The effect on social welfare can be positive or negative, depending on the distribution of clients' service demands. General bans on auditor provision of NAS can, via similar channels, increase or decrease audit quality and social welfare. Overall, our findings suggest a more nuanced view of how regulating an auditor's provision of NAS might affect audit quality and social welfare, and are driven by the effects of multimarket competition on the auditor's incentives to invest in audit quality, rather than previously identified auditor independence or knowledge spillover channels.

We examine how supplier industry competition affects CEO incentive intensity in procuring firms. Using Bureau of Economic Analysis data to compute a weighted supplier industry competition measure, we predict and find that higher supplier competition is associated with stronger CEO pay-for-performance incentive intensity. This effect is incremental to that of the firm's own industry competition previously documented and is robust to alternative measures of supplier competition and to exogenous shocks to competition. Importantly, we show that performance risk and product margin act as mediating variables in the relation between supplier competition and CEO incentive intensity providing support for the theory underpinning our finding. We document that CEO compensation contracts are used as a mechanism to exploit the market dynamics of upstream industries to a firm's benefit. Our findings are economically important as suppliers provide, on average, 45 percent of the value delivered by procuring firms to the market (BEA, 2016).

ABSTRACT The fact that incumbent firms can immediately deduct research and development (R&D) investments from taxable income is generally believed to give them a strategic advantage over new firms that cannot deduct the investment cost, but instead generate a net operating tax loss carryover. Using an analytical model, we show that this conventional wisdom need not hold in a competitive environment. We examine operating and investment decisions in a duopolistic industry in which an initial investment in R&D yields an immediate tax benefit for one firm, but creates a net operating loss carryover for the other firm. If both firms invest in R&D, the firm with the net operating loss carryover makes more aggressive capital investment decisions following successful R&D. This may deter the incumbent firm from investing in R&D despite the lower aftertax costs of this investment. Changing the tax loss carryover rules would thus not only affects start‐up or loss firms, but would also affect the investment decisions of profitable firms in the same industry.

Regulators have expressed concerns that an emphasis on non-audit services (NAS) could distract from the audit function, even for clients with minimal NAS purchases. Motivated by this concern, we examine whether a greater emphasis on providing NAS to audit clients generally (i.e., not to a specific client) can distract from the audit function, thus reducing audit quality. We find evidence of an NAS distraction effect, where a greater emphasis on NAS at the audit office-level results in more client financial statement restatements, even after controlling for client-specific NAS. Further, the association exists among clients that purchase minimal NAS, suggesting that this association relates to distraction effects in addition to independence issues examined in prior research. This study should be of interest to audit firms, audit committees, and regulators because it provides new evidence regarding issues related to a business model that includes both audit and non-audit services.

Kirk, Reppenhagen, and Tucker (2014) find that investors use individual analyst forecasts as additional earnings benchmarks. We investigate whether executives manage earnings to beat these individual benchmarks. Using year-end effective tax rate (ETR) manipulation as our setting, we find that firms decrease ETRs from 3rd to 4th quarter to meet or beat a greater percentage of individual forecasts. We also find some evidence that firms use incremental ETR changes to meet forecasts by key analysts. After controlling for the distance to the nearest forecast, our evidence shows that firms are more likely to beat an incremental forecast with a decrease in ETR compared to missing an incremental forecast with an increase in ETR. Our study highlights the strategic nature of earnings management by providing evidence that managers consider individual forecasts to calibrate earnings management decisions.

We use linked birth and education records from Florida to investigate how the identification of childhood disabilities varies by race and school racial composition. Using a series of decompositions, we find that black and Hispanic students are identified with disabilities at lower rates than are observationally similar white students. Black and Hispanic students are overidentified in schools with relatively small shares of minorities and substantially underidentified in schools with large minority shares. Our results are consistent with a heightened awareness among school officials of disabilities in students who are racially and ethnically distinct from the majority race in the school.