The correlation between governance indices and abnormal returns documented for 1990–1999 subsequently disappeared. The correlation and its disappearance are both due to market participants' gradually learning to appreciate the difference between good-governance and poor-governance firms. Consistent with learning, the correlation's disappearance was associated with increases in market participants' attention to governance; market participants and security analysts were, until the beginning of the 2000s but not subsequently, more positively surprised by the earning announcements of good-governance firms; and, although governance indices no longer generated abnormal returns during the 2000s, their negative association with firm value and operating performance persisted.

The range of admissible price and income elasticity estimates is materially reduced in this investigation of a variety of procedures, including new methods for analyzing deflation bias. Mostly small effects are found for choice of index formula, base year, logarithmic versus linear form, definition of food consumption (e.g., physical versus expenditure measure), procedures related to time, and aggregation. However, the supply elasticity of food is found to be identifiable and to have a value greater than many have believed, providing a basis for deciding whether to favor demand estimates based on consumption-dependent or pricedependent regressions. The most frequently used deflators are inconsistent with the SlutskySchultz relation. Estimates are developed of three types of bias due to improper deflation (weight of food in deflator, correlation of deflator with residual, and formula nonconformities).

Firms with central boards of directors earn superior risk-adjusted stock returns. A long (short) position in the most (least) central firms earns average annual returns of 4.68%. Firms with central boards also experience higher future return-on-assets growth and more positive analyst forecast errors. Return prediction, return-on-assets growth, and analyst errors are concentrated among high growth opportunity firms or firms confronting adverse circumstances, consistent with boardroom connections mattering most for firms standing to benefit most from information and resources exchanged through boardroom networks. Overall, our results suggest that director networks provide economic benefits that are not immediately reflected in stock prices.

ABSTRACT Staggered boards (SBs) are one of the most potent common entrenchment devices, and their value effects are considerably debated. We study SBs' effects on firm value, managerial behavior, and investor composition using a quasi‐experimental setting: a 1990 law that imposed SBs on all Massachusetts‐incorporated firms. We find that relative to a matched control group of companies, for treated companies the law led to an increase in Tobin's Q, investment in capital expenditures and R&D, patents, and higher‐quality patented innovations, resulting in higher profitability. These effects are concentrated in innovating firms, especially those facing greater Wall Street scrutiny. An increase in institutional and dedicated investors also accompanied the imposition of SBs, facilitating a longer‐term orientation. The evidence suggests that SBs can benefit early‐life‐cycle firms facing high information asymmetries by allowing their managers to focus on long‐term investments and innovations.

We provide a tractable model of firm-level expected holding period returns using two firm fundamentals—book-to-market ratio and return on equity—and study the cross-sectional properties of the model-implied expected returns. We find that firm-level expected returns and expected profitability are time-varying but highly persistent and that forecasts of holding period returns strongly predict the cross section of future returns up to three years ahead. We show a highly significant predictive pooled regression slope for future quarterly returns of 0.86. The popular factor-based expected return models have either an insignificant or a significantly negative association with future returns. In supplemental analyses, we show that these forecasts are also informative of the time series variation in aggregate conditions. For a representative firm, the slope of the conditional expected return curve is more positive in good times, when expected short-run returns are relatively low, and the model-implied forecaster of aggregate returns exhibits modest predictive ability. Collectively, we provide a simple, theoretically motivated, and practically useful approach to estimating multi-period-ahead expected returns.

Using a novel dataset, we show that components of firms’ GAAP earnings stemming from ancillary business activities or transitory shocks are significant in frequency and magnitude. These components have grown over time and are dispersed across various sections of the 10-K. Excluding them from GAAP earnings yields a core earnings measure that distinguishes between the recurring and non-recurring components of net income and forecasts future performance. Analysts and market participants are slow to impound these earnings components’ implications, particularly the amounts disclosed in the footnotes. Trading strategies that exploit non-core earnings produce abnormal returns of 8% per year.

After decades of de-prioritizing shareholders’ economic interests and low corporate profitability, Japan introduced the JPX-Nikkei400 in 2014. The index highlighted the country’s “best-run” companies by annually selecting the 400 most profitable of its large and liquid firms. We find that managers competed for inclusion in the index by significantly increasing return on equity (ROE), and they did so at least in part due to their reputational or status concerns. The ROE increase was predominantly driven by improvements in margins, which were in turn partially driven by cutting research and development (R&D) intensity. Our findings suggest that indexes can affect managerial behavior through reputational or status incentives.

Abstract We introduce a parsimonious framework for choosing among alternative expected-return proxies (ERPs) when estimating treatment effects. By comparing ERPs’ measurement error variances in the cross-section and in the time series, we provide new evidence on the relative performance of firm-level ERPs nominated by recent studies. Generally, “implied-costs-of-capital” metrics perform best in the time series, whereas “characteristic-based” proxies perform best in the cross-section. Factor-based ERPs, even the latest renditions, perform poorly. We revisit four prior studies that use ex ante ERPs and illustrate how this framework can potentially alter either the sign or the magnitude of prior inferences.

We examine the effect of competition shocks induced by major industry-level tariff cuts on forced CEO turnover. Both the likelihood of forced CEO turnover and its sensitivity to performance increase. These effects are stronger for firms exposed to greater predation risk and with products more similar to those of other firms. CEOs are more likely to be forced out in weak governance firms; however, in good governance firms, CEOs are offered higher incentive pay. New outside CEOs receive higher incentive pay and come from firms with lower cost structures and higher asset sales. Performance and productivity improve after forced turnover. Received November 27, 2014; editorial decision July 18, 2017 by Editor David Denis. 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.

This paper presents a new model for the valuation of European options, in which the volatility of returns consists of two components. One is a long-run component and can be modeled as fully persistent. The other is short-run and has a zero mean. Our model can be viewed as an affine version of Engle and Lee [1999. A permanent and transitory component model of stock return volatility. In: Engle, R., White, H. (Eds.), Cointegration, Causality, and Forecasting: A Festschrift in Honor of Clive W.J. Granger. Oxford University Press, New York, pp. 475–497], allowing for easy valuation of European options. The model substantially outperforms a benchmark single-component volatility model that is well established in the literature, and it fits options better than a model that combines conditional heteroskedasticity and Poisson–normal jumps. The component model's superior performance is partly due to its improved ability to model the smirk and the path of spot volatility, but its most distinctive feature is its ability to model the volatility term structure. This feature enables the component model to jointly model long-maturity and short-maturity options.