We examine whether sharp debt increases through leveraged buyouts and recapitalizations interact with market structure to influence plant closing and investment decisions of recapitalizing firms and their rivals. We take into account the fact that recapitalizations and investment decisions are both endogenous and may be simultaneously influenced by the same exogenous events. Following their recapitalizations, firms in industries with high concentration are more likely to close plants and less likely to invest. Rival firms are less likely to close plants and more likely to invest when the market share of leveraged firms is higher.

This paper investigates the deterioration of the banking industry's risk-control system during the 1980s and the time-varying relation between a bank's ex-ante risk-taking incentives and its ex-post risk-taking behavior over the period 1977–1994. We document that banks with high charter value imposed self-discipline on risk-taking behavior at all times. In contrast, banks with low charter value assumed significantly more risk beginning around 1983, and this behavior continued into the early 1990s. These findings have several important policy implications.

Option market activity increases by more than 10 percent in the four days before quarterly earnings announcements. We show that the direction of this preannouncement trading foreshadows subsequent earnings news. Specifically, we find option traders initiate a greater proportion of long (short) positions immediately before “good” (“bad”) earnings news. Midquote returns to active‐side option trades are positive during nonannouncement periods and are significantly higher immediately prior to earnings announcements. Bid‐ask spreads for options widen during the announcement period, but traders do not gravitate toward high delta contracts. Collectively, the evidence shows option traders participate generally in price discovery (the incorporation of private information in price), and more specifically in the dissemination of earnings news.

Auditing, Auditor Judgment, Dilution effect, Accountability

We analyze the empirical power and specification of test statistics in event studies designed to detect long-run (one- to five-year) abnormal stock returns. We document that test statistics based on abnormal returns calculated using a reference portfolio, such as a market index, are misspecified (empirical rejection rates exceed theoretical rejection rates) and identify three reasons for this misspecification. We correct for the three identified sources of misspecification by matching sample firms to control firms of similar sizes and book-to-market ratios. This control firm approach yields well-specified test statistics in virtually all sampling situations considered.

We compare top management turnover in unacquired U.S. industrial companies during an active takeover market (1984–1988) and a less active takeover market (1989–1993). For firms in the lowest quartile of performance (measured by operating income scaled by assets). 33% experience complete turnover of the president, CEO, and board chair during the active takeover period and only 17% experience complete turnover during the less active period. Controlling for various determinants of management turnover, we provide evidence that turnover and performance are related only in the active takeover period, and conclude that takeover activity affects the intensity of managerial discipline.

This paper develops a model of the optimal investment strategy for a firm confronted with a sequence of technological innovations. We incorporate many of the most important characteristics of real-world technology markets. For example, we permit innovations to be stochastic in their arrival times and their profitability. We also incorporate learning so that firms adopting current innovations become better able to benefit from future innovations. The model yields four distinct investment strategies. The model is then used to predict actual firm policy. These implications are discussed and compared with observed firm behavior.

The paper shows that an increase in competition has two effects on managerial incentives: It increases the probability of liquidation, which has a positive effect on managerial effort, but it also reduces the firm's profits, which may make it less attractive to induce high effort. Thus, the total effect is ambiguous. I identify natural circumstances where increasing competition unambiguously reduces managerial slack. In general, however, this relation need not be monotonic. A simple example demonstrates that—starting from a monopoly—managerial effort may increase as additional competitors enter the market, but will eventually decrease when competition becomes too intense.

This article examines the relationship between the volatility of the crude oil futures market and changes in initial margin requirements. To closely match changes in futures market volatility with the corresponding changes in margin requirements, we infer the volatility of the futures market from the prices of crude oil futures options contracts. Using a mean-reverting diffusion process for volatility, we show that changes in margin policy do not affect subsequent market volatility.

This article examines the relationship between the volatility of the crude oil futures market and changes in initial margin requirements. To closely match changes in futures market volatility with the corresponding changes in margin requirements, we infer the volatility of the futures market from the prices of crude oil futures options contracts. Using a mean-reverting diffusion process for volatility, we show that changes in margin policy do not affect subsequent market volatility.