This article documents differences between the Q-sensitivity of investment of stand-alone firms and unrelated segments of conglomerate firms. Unrelated segments exhibit lower Q-sensitivity of investment than stand-alone firms. This fact is driven by unrelated segments of conglomerate firms that tend to invest less than stand-alone firms in high-Q industries. This finding is robust to matching on industry, year, size, age, and profitability. The differences are more pronounced in conglomerates in which top management has small ownership stakes, suggesting that agency problems explain the investment behavior of conglomerates.

[This article documents differences between the Q-sensitivity of investment of stand-alone firms and unrelated segments of conglomerate firms. Unrelated segments exhibit lower Q-sensitivity of investment than stand-alone firms. This fact is driven by unrelated segments of conglomerate firms that tend to invest less than stand-alone firms in high-Q industries. This finding is robust to matching on industry, year, size, age, and profitability. The differences are more pronounced in conglomerates in which top management has small ownership stakes, suggesting that agency problems explain the investment behavior of conglomerates.]

Based on extant literature, we review the positive theory of GAAP. The theory predicts that GAAP’s principal focus is on control (performance measurement and stewardship) and that verifiability and conservatism are critical features of a GAAP shaped by market forces. We recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets, but caution against expanding fair values to financial reporting more generally. We conclude that rather than converging U.S. GAAP with IFRS, competition between the FASB and the IASB would allow GAAP to better respond to market forces.

In this paper, we study how risk-shifting incentives and the design of debt covenants are affected by the pattern of temporal resolution of uncertainty (TRU) in the underlying technology of the firm. We show that the extent of risk-shifting as well as the yield demanded on corporate debt are larger the later the resolution of uncertainty (thus providing one explanation for the empirical evidence of Reisz and Perlich (2006)). We allow for contracting based on verifiable information disclosed by the manager. In this context, we characterize optimal covenants restricting investment. The effects of these covenants on the firm's investment policy and corporate bond yields under different disclosure policies and patterns of TRU are studied. Empirical implications are derived and discussed.

We review recent literature on the role of financial reporting transparency in reducing governance-related agency conflicts among managers, directors, and shareholders, as well as in reducing agency conflicts between shareholders and creditors, and offer researchers some suggested avenues for future research. Key themes include the endogenous nature of debt contracts and governance mechanisms with respect to information asymmetry between contracting parties, the heterogeneous nature of the informational demands of contracting parties, and the heterogeneous nature of the resulting governance and debt contracts. We also emphasize the role of a commitment to financial reporting transparency in facilitating informal multiperiod contracts among managers, directors, shareholders, and creditors.

[This article, which introduces the special issue on corporate governance cosponsored by the Review of Financial Studies and the National Bureau of Economic Research (NBER), reviews and comments on the state of corporate governance research. The special issue features seven articles on corporate governance that were presented in a meeting of the NBER's corporate governance project. Each of the articles represents state-of-the-art research in an important area of corporate governance research. For each of these areas, we discuss the importance of the area and the questions it focuses on, how the article in the special issue makes a significant contribution to this area, and what we do and do not know about the area. We discuss in turn work on shareholders and shareholder activism, directors, executives and their compensation, controlling shareholders, comparative corporate governance, cross-border investments in global capital markets, and the political economy of corporate governance.]

[We investigate corporate financial policies in the presence of both temporary and permanent shocks to firms' cash flows. In our framework, cash flows can be negative and are imperfectly correlated with firm value, and earnings volatility differs from asset volatility. These results are consistent with empirical stylized facts. They are also contrary to the implications of existing dynamic capital structure models that allow only for permanent shocks to cash flows. Temporary shocks increase the importance of financial flexibility and may provide an intuitively simple and realistic explanation of empirically observed financial conservatism and low leverage phenomena. The theoretical framework developed in this article general enough to be used in various corporate finance applications.]

The subjective likelihood of a contingency often depends on the manner in which it is described to the decision maker. To accommodate this dependence, we introduce a model of decision making under uncertainty that takes as primitive a family of preferences indexed by partitions of the state space. Each partition corresponds to a description of the state space. We characterize the following partition-dependent expected utility representation. The decision maker has a nonadditive set function ν over events. Given a partition of the state space, she computes expected utility with respect to her partition-dependent belief, which weights each cell in the partition by ν. Nonadditivity of ν allows the probability of an event to depend on the way in which the state space is described. We propose behavioral definitions for those events that are transparent to the decision maker and those that are completely overlooked, and connect these definitions to conditions on the representation.

Recent theoretical and empirical advances have renewed interest in monopsonistic models of the labor market. However, there is little direct empirical support for these models. We use an exogenous change in wages at Department of Veterans Affairs (VA) hospitals as a natural experiment to investigate the extent of monopsony in the nurse labor market. We estimate that labor supply to individual hospitals is quite inelastic, with short‐run elasticity around 0.1. We also find that non‐VA hospitals responded to the VA wage change by changing their own wages.

Calls for eliminating differences between accounting earnings and taxable income in the US have been debated extensively. Proponents of increased book-tax conformity argue that tax compliance will increase and earnings quality will improve. Opponents argue that earnings quality will decline. We examine whether the level of required book-tax conformity affects earnings persistence and the association between earnings and future cash flows. We develop a comprehensive book-tax conformity measure and find that earnings have lower persistence and a lower association with future cash flows when conformity is higher. Our evidence suggests that increased book-tax conformity may reduce earnings quality.