ABSTRACT In this paper, I examine the effect of pension policy on the structure of financial systems around the world. In particular, I explore the hypothesis that policies that promote pension savings also promote the development of capital markets. I present a model that endogenizes the extent to which savings are intermediated through banks or capital markets, and derive implications for corporate finance, household finance, banking, and the size of the financial sector. I then present a number of facts that are broadly consistent with the theory and examine a variety of alternative explanations of my findings.

We provide evidence concerning the effect of managerial risk-taking incentives on merger and acquisition (M&A) decisions and outcomes for different types of mergers: vertical, horizontal, and diversifying. Using chief executive officer (CEO) relative inside leverage to proxy for the incentives of risk-averse managers, we find that CEOs with higher inside leverage are more likely to engage in vertical mergers, and those mergers generate lower announcement returns for shareholders. This effect of CEO relative inside leverage on returns for shareholders in vertical acquisitions is more pronounced when the acquirer has a higher degree of informational opacity, weak governance, and excess cash.

Prior research suggests that the effectiveness of corporate directors depends on their qualifications. We investigate whether directors' qualifications affect the roles they perform on the board (board functions) and their compensation. On average, directors that are more qualified handle more board functions, resulting in higher pay, but this is not true for “co-opted” directors (joined the board after the CEO). However, co-opted directors are assigned more functions and receive higher pay on boards where the CEO's influence is high. We also find that some firms award directors “discretionary compensation” (compensation that is unrelated to board functions), and that the likelihood of such compensation is correlated with CEO power. Overall, our evidence generates new insights into how director roles and financial incentives are allocated across directors, and the extent to which this allocation depends on CEO power.

We compute a sunspot equilibrium in an estimated small-scale New Keynesian model with a zero lower bound (ZLB) constraint on nominal interest rates and a full set of stochastic fundamental shocks. In this equilibrium, a sunspot shock can move the economy from a regime in which inflation is close to the central bank’s target to a regime in which the central bank misses its target, inflation rates are negative, and interest rates are close to zero with high probability. A non-linear filter is used to examine whether the U.S. in the aftermath of the Great Recession and Japan in the late 1990s transitioned to a deflation regime. The results are somewhat sensitive to the model specification, but on balance, the answer is affirmative for Japan and negative for the U.S.

We describe a symmetric continuous-time model of trading among relatively overconfident, oligopolistic informed traders with exponential utility. Traders agree to disagree about the precisions of their continuous flows of Gaussian private information. The price depends on a trader’s inventory (permanent price impact) and the derivative of a trader’s inventory (temporary price impact). More disagreement makes the market more liquid; without enough disagreement, there is no trade. Target inventories mean-revert at the same rate as private signals. Actual inventories smoothly adjust towards target inventories at an endogenous rate which increases with disagreement. Faster-than-equilibrium trading generates “flash crashes” by increasing temporary price impact. A “Keynesian beauty contest” dampens price fluctuations.

This paper uses new data from the PSID to quantify the relative importance of negative equity versus ability to pay, in driving mortgage defaults between 2009 and 2013. These data allow us to construct household budgets sets that provide better measures of ability to pay. Changes in ability to pay have large estimated effects. Job loss has an equivalent effect on the propensity to default as a 35% decline in equity. Strategic motives are also found to be quantitatively important, as we estimate more than 38% of households in default could make their mortgage payments without reducing consumption.

Abstract We model relative performance evaluation ( RPE ) when a Chief Executive Officer ( CEO ) has the power to opportunistically influence the design of RPE by choosing the weight on an index‐based peer group or by customizing the selection of peers comprising a peer group. A powerful CEO compares the benefits of reducing common risk affecting his compensation with the benefits of receiving a higher bonus by economizing on expected peer‐group performance. As a consequence, the Board of Directors (BoD) is less likely to use RPE . Our analytical model yields hypotheses predicting that powerful CEO s choose to reduce common risk only partially and that BoDs choose to not implement RPE if expected peer performance is sufficiently high. Our model has further empirical implications in (i) providing new interpretations of tests for detecting strong‐form and weak‐form RPE in the presence of powerful CEO s, and (ii) suggesting a new empirical measure of CEO power with a focus on the delegation of RPE decision rights.

This paper focuses on funds of funds (FOFs) as a form of financial intermediation in private equity (both buyout and venture capital). After accounting for fees, FOFs provide returns equal to or above public market indices for both buyout and venture capital. While FOFs focusing on buyouts outperform public markets, they underperform direct fund investment strategies in buyout. In contrast, the average performance of FOFs in venture capital is on a par with results from direct venture fund investing. This suggests that FOFs in venture capital (but not in buyouts) are able to identify and access superior performing funds.

We study the sources of corporate default clustering in the United States. We reject the hypothesis that firms’ default times are correlated only because their conditional default rates depend on observable and latent systematic factors. By contrast, we find strong evidence that contagion, through which the default by one firm has a direct impact on the health of other firms, is a significant clustering source. The amount of clustering that cannot be explained by contagion and firms’ exposure to observable and latent systematic factors is insignificant. Our results have important implications for the pricing and management of correlated default risk.