This paper develops and tests a new theoretical explanation for stock repurchases. Investors may disagree with the manager about the firm's investment projects. A repurchase causes a change in the investor base as investors who are most likely to disagree with the manager tender their shares. Therefore, a firm is more likely to buy back shares when the level of investor-management agreement is lower, and agreement improves as a consequence. Moreover, dispersion of opinion among investors cannot explain repurchase activity once the stock price and investor-management agreement are controlled for. Overall, the evidence is consistent with firms strategically using repurchases to improve alignment between management and shareholders.

We study stochastic games with an infinite horizon and sequential moves played by an arbitrary number of players. We assume that social memory is finite--every player, except possibly one, is finitely lived and cannot observe events that are sufficiently far back in the past. This class of games includes games between a long-run player and a sequence of short-run players, and games with overlapping generations of players. An equilibrium is purifiable if some close-by behaviour is consistent with equilibrium when agents' payoffs in each period are perturbed additively and independently. We show that only Markov equilibria are purifiable when social memory is finite. Thus if a game has at most one long-run player, all purifiable equilibria are Markov.

A key prediction of dynamic labor demand models is that firing restrictions attenuate firms' employment responses to economic fluctuations. We provide the first direct test of this prediction using data from India. We exploit the fact that rainfall fluctuations, through their effects on agricultural productivity, generate variation in local demand within districts over time. Consistent with the theory, we find that industrial employment is more sensitive to shocks where labor regulation is less restrictive. Our results are robust to controlling for endogenous firm placement and vary across factory size in a pattern consistent with institutional features of Indian labor law.

What determines the sustainability of sovereign debt? In this paper, we develop a model where myopic governments seek electoral popularity but can nevertheless commit credibly to service external debt. They do not default when they are poor because they would lose access to debt markets and be forced to reduce spending; they do not default when they become rich because of the adverse consequences to the domestic financial sector. Interestingly, the more myopic a government, the greater the advantage it sees in borrowing, and therefore the less likely it will be to default (in contrast to models where sovereigns repay because they are concerned about their long term reputation). More myopic governments are also likely to tax in a more distortionary way, and create more dependencies between the domestic financial sector and government debt that raise the costs of default. We use the model to explain recent experiences in sovereign debt markets.

We build an equilibrium model of commodity markets in which speculators are capital constrained, and commodity producers have hedging demands for commodity futures. Increases in producers' hedging demand or speculators' capital constraints increase hedging costs via price-pressure on futures. These in turn affect producers' equilibrium hedging and supply decision inducing a link between a financial friction in the futures market and the commodity spot prices. Consistent with the model, measures of producers' propensity to hedge forecasts futures returns and spot prices in oil and gas market data from 1979 to 2010. The component of the commodity futures risk premium associated with producer hedging demand rises when speculative activity reduces. We conclude that limits to financial arbitrage generate limits to hedging by producers, and affect equilibrium commodity supply and prices.

We analyze a reduced-form framework for understanding the equity loan market's impact on share prices. We show that hard-to-borrow stocks will have distinct return patterns, responding more to shocks in the supply of shares available, and to changes in the heterogeneity of investor beliefs, than other stocks. We conduct two empirical tests in which we find strong support for these equilibrium predictions. In our first test, we take advantage of a tax-driven exogenous shock to share loan supply and find that when supply is reduced around dividend record dates, prices of hard-to-borrow stocks increase 1.1% while prices of easy-to-borrow stocks are unaffected. In our second test, we find that hard-to-borrow stocks have 4.8% lower three-month returns than other stocks, with negative returns concentrated in stocks with high heterogeneity in investor beliefs. Thus, we extend the Diether, Malloy, and Scherbina (2002) result that stocks with a greater dispersion of investor beliefs have lower returns.

International audience

We study whether and how family control affects valuation and corporate decisions during the 2008–2009 financial crisis using a sample of more than 8,500 firms from 35 countries. We find that family-controlled firms underperform significantly, they cut investment more relative to other firms, and these investment cuts are associated with greater underperformance. Further, we find that within family groups liquidity shocks are passed on through investment cuts across the group. Our evidence is consistent with families taking actions to increase the likelihood that the firms under their control and their control benefits survive the crisis, at the expense of outside shareholders.

Evidence from both psychology and economics indicates that individuals give statements that appear to overestimate their ability compared to that of others. We test three theories that predict such relative overconfidence. The first theory argues that overconfidence can be generated by Bayesian updating from a common prior and truthful statements if individuals do not know their true type. The second theory suggests that self-image concerns asymmetrically affect the choice to receive new information about one's abilities, and this asymmetry can produce overconfidence. The third theory is that overconfidence is induced by the desire to send positive signals to others about one's own skill; this suggests either a bias in judgement, strategic lying, or both. We formulate this theory precisely. Using a large data set of relative ability judgements about two cognitive tests, we reject the restrictions imposed by the Bayesian model and also reject a key prediction of the self-image models that individuals with optimistic beliefs will be less likely to search for further information about their skill because this information might shatter their self-image. We provide evidence that personality traits strongly affect relative ability judgements in a pattern that is consistent with the third theory of social signalling. Our results together suggest that overconfidence in statements is more likely to be induced by social concerns than by either of the other two factors.

This study examines how different components of executive compensation affect the cost of debt. We find that debt-like and equity-like pay components have differing effects: an increase in defined benefit pensions is associated with lower bond yield spread, while higher share holdings lead to higher spreads. In addition, we find that stock options have a mixed impact on the cost of debt whereas cash bonus has no significant impact. Overall, our results indicate that corporate bondholders are fully aware of both risk-taking and risk-avoiding incentives created by various executive pay components.