We examine the effects of executive compensation and investor protection on payout policy in Europe. We find a negative (positive) relationship between both option and restricted stock compensation and dividends (repurchases). However, when the incentive compensation is dividend protected, dividend payouts increase. Firms in weak investor protection countries pay higher dividends consistent with maintaining a reputation for distributing excess free cash flows. However, growth firms in weak investor protection countries reduce dividends (increase repurchases) in relation to increases in equity-incentive compensation. Our results are consistent with growth firms in weak investor protection countries using equity incentives as a substitute for dividends to reduce agency costs.

Applying a “co-search” algorithm to Internet traffic at the SEC׳s EDGAR website, we develop a novel method for identifying economically related peer firms and for measuring their relative importance. Our results show that firms appearing in chronologically adjacent searches by the same individual (Search-Based Peers or SBPs) are fundamentally similar on multiple dimensions. In direct tests, SBPs dominate GICS6 industry peers in explaining cross-sectional variations in base firms׳ out-of-sample: (a) stock returns, (b) valuation multiples, (c) growth rates, (d) R&D expenditures, (e) leverage, and (f) profitability ratios. We show that SBPs are not constrained by standard industry classification, and are more dynamic, pliable, and concentrated. We also show that co-search intensity captures the degree of similarity between firms. Our results highlight the potential of the collective wisdom of investors — extracted from co-search patterns — in addressing long-standing benchmarking problems in finance.

Abstract Hedge fund intervention has been associated with many positive corporate changes and is an important vehicle for informed shareholder monitoring. Effective monitoring has also been positively associated with accounting conservatism. Building upon these prior results, we predict an increase in accounting conservatism after hedge fund intervention. We use a large sample of hedge fund activist events and identify control firms with similar likelihoods of being targeted using the propensity score matching method to apply difference‐in‐difference tests. We find that when hedge fund activists have relatively large ownership and sufficient time to exert their monitoring power, target firms experience significant increases in conditional conservatism. CFO turnovers, upward/lateral auditor switches, and improvements in audit committee independence after intervention are accompanied by greater increases in conditional conservatism. Finally, we find greater increases in conditional conservatism when there is a lack of monitoring by dedicated institutional investors before the intervention. Our study suggests that hedge fund activists improve accounting monitoring tools and thus adds important new evidence on the effectiveness of shareholder monitoring on accounting practices.

Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis point increase in the two-year nominal yield on a Federal Open Markets Committee announcement day is associated with a 42 basis point increase in the ten-year forward real rate. This finding is at odds with standard macro-models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Instead, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that could generate such variation in term premia is based on demand effects due to the existence of what we call yield-oriented investors. We find some evidence supportive of this channel.

ABSTRACT Our objective is to penetrate the “black box” of sell‐side financial analysts by providing new insights into the inputs analysts use and the incentives they face. We survey 365 analysts and conduct 18 follow‐up interviews covering a wide range of topics, including the inputs to analysts’ earnings forecasts and stock recommendations, the value of their industry knowledge, the determinants of their compensation, the career benefits of Institutional Investor All‐Star status, and the factors they consider indicative of high‐quality earnings. One important finding is that private communication with management is a more useful input to analysts’ earnings forecasts and stock recommendations than their own primary research, recent earnings performance, and recent 10‐K and 10‐Q reports. Another notable finding is that issuing earnings forecasts and stock recommendations that are well below the consensus often leads to an increase in analysts’ credibility with their investing clients. We conduct cross‐sectional analyses that highlight the impact of analyst and brokerage characteristics on analysts’ inputs and incentives. Our findings are relevant to investors, managers, analysts, and academic researchers.

Abstract A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing also becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money market funds sharply reducing their exposure to European banks in the year that followed. During this period dollar lending by Eurozone banks fell relative to their euro lending, and firms who were more reliant on Eurozone banks before the Eurozone crisis had a more difficult time borrowing.

We show that the allocation of managerial ownership to individuals within firms varies depending upon the joint distribution of decision control and decision management rights. Using a unique dataset of institutional investment management firms, we show that ownership is higher for managers: with both executive and operational responsibilities; when benefits of cooperation are higher; and with large contributions to firm value. Consistent with career concerns, we find increases in a manager's ownership are associated with increases in unsystematic risk. Ownership dispersion within the firm is associated with the allocation of monitoring and operational roles and the potential benefits of cooperation.

Abstract The suitability of complex financial products for household investors is an important issue in light of consumer financial protection. The U.S. Dodd–Frank Act, for instance, mandates that distributors check suitability when selling structured products to retail investors. However, little empirical evidence exists on such transactions. Using data from Hong Kong, we find that investors purchase 8% more structured products, on average, when the suitability is not checked. The effect of suitability checks is more pronounced for less financially literate investors. Moreover, investors tend to buy products with lower risk-adjusted returns when product suitability is not checked.

Abstract This study compares auditors' and chief financial officers' pre‐negotiation judgments and considers the potential differential impact the end of the audit (deadline pressure) has on each party. General negotiation literature suggests that individuals change their behaviors as deadline pressure increases (i.e., when there is less time in which to conduct a negotiation) in order to increase the probability of reaching an agreement. In an audit context, the end‐of‐engagement deadline is often based on regulatory filing deadlines (e.g., SEC filings for public companies), which are not determined by either negotiating party. The audit context is also unique in that there are asymmetric consequences for each party (the auditor and client management) for failing to reach an agreement and different negotiation tactics used by the two parties potentially leading to differing levels of concessions. We predict that auditors, who are in a stronger negotiation position, will generally concede less than client management when determining their pre‐negotiation position and will tend to use more contentious strategies. However, such contentious strategies require time. Thus, we expect, based on negotiation theory, that as deadline pressure increases, auditors' concessionary behavior will be more affected than that of client management. Consistent with expectations, results of our experiment suggest that CFOs concede more than auditors in general; however, auditors are more reactive to deadline pressure and increase concessions when faced with high deadline pressure, while CFOs do not. We also measure planned strategy use and find results to be consistent with theory: when deadline pressure is high, auditors are less likely to use contentious tactics, while CFOs' strategy choices are unaffected by deadline pressure. These results suggest that characteristics of the unique auditor–client negotiation environment, such as deadline pressures, have potentially differential effects on both parties due to the differing negotiation strategies employed by these parties.