Large U.S. banks dramatically increased their capitalization during the 1990s, to the highest levels in more than 50 years. We document this buildup of capital and evaluate several potential motivations. Our results support the hypothesis that regulatory innovations in the early 1990s weakened conjectural government guarantees and enhanced bank counterparties' incentives to monitor and price default risk. We find no evidence that a bank holding company's (BHC's) market capitalization increases with its asset volatility prior to 1994. Thereafter, the data display a strong cross-sectional relation between capitalization and asset risk.

We model and experimentally examine the board structure–performance relationship. We examine single-tiered boards, two-tiered boards, insider-controlled boards, and outsider-controlled boards. We find that even insider-controlled boards frequently adopt institutionally preferred rather than self-interested policies. Two-tiered boards adopt institutionally preferred policies more frequently but tend to destroy value by being too conservative, frequently rejecting good projects. Outsider-controlled single-tiered boards, both when they have multiple insiders and only a single insider, adopt institutionally preferred policies most frequently. In those board designs where the efficient Nash equilibrium produces strictly higher payoffs to all agents than the coalition-proof equilibria, agents tend to select the efficient Nash equilibria.

We explore the influence of priming on financial decisions by reinforcing subjects' risk-seeking behavior under uncertainty and comparing it to behavior in control groups. We focused on professionals: commercial banks' investment advisors and accountants in CPA firms. Results indicate that priming affects subjects' risk attitudes and investment decisions. Professionals' decisions were affected more than undergraduates', suggesting they employ a more intuitive and less analytic approach in making their decisions. Our work is related to field-data research documenting correlations between returns (investors' decisions) and situational factors, (i.e., weather) by suggesting controlled tests of professionals' behavior vis-a-vis the complexity inherent in field data

This paper considers share repurchases as the way long-term shareholders preserve their ability to use corporate information for speculative purposes when insider trading regulation is enforced. This use of corporate information increases the adverse selection losses of short-term shareholders. Thus, buy-back programs reduce their incentive to invest in stocks that back the most productive technology, leading to a socially inefficient equilibrium. It follows that insider trading should not be banned when share repurchases are allowed. More generally, the paper argues that the regulation of insider trading and repurchases can not be considered in isolation, and analyzes their interplay

The tendency to introduce anonymity into financial markets apparently runs counter to the theory supporting transparency. This paper studies the impact of pre-trade transparency on liquidity in a market where risk-averse traders accommodate the liquidity demand of noise traders. When some risk-averse investors become informed, an adverse selection problem ensues for the others, making them reluctant to supply liquidity. Hence the disclosure of traders' identities improves liquidity by mitigating adverse selection. However, informed investors are effective liquidity suppliers, as their adverse selection and inventory costs are minimized. With endogenous information acquisition, transparency reduces the number of informed investors, thus decreasing liquidity. The type of information that traders hold and the effectiveness of insider trading regulation are crucial to distinguish between equilibria

I study the determinants of changes in credit spreads for U.S. dollar denominated domestic and foreign sovereign bonds using fundamentals specified by structural models to separate spreads into their credit and non-credit components. I find that the non-default portions of spreads have a component that is common for each type of debt. Further, using a vector autoregressive model, I find that domestic spreads are related to the lagged component of sovereign spreads. I also find that some proxies for liquidity are related to the common components, suggesting a liquidity-based explanation for the common component not identified by previous research.

This paper uses an optimal auction approach to investigate the conditions under which uniform pricing in IPOs is optimal. We show that the optimality of a uniform price in IPOs depends crucially on whether the (optimal) allocation rule is restricted. These restrictions may stem from the retail investors' budget constraint and/or from the institutional investors' preferences. We show that the main determinant of the optimality of a uniform pricing rule is the existence and the shape of the retail investors' budget constraint. In contrast, institutional investors' preferences are shown to mainly affect the optimal allocation rule

We survey the empirical literature on disproportional ownership, i.e. the use of mechanisms that separate voting rights from cash flow rights in corporations. Our focus is mostly on explicit mechanisms that allow some shareholders to acquire control with less than proportional economic interest in the firm (dual-class equity structures, stock pyramids, cross-ownership, etc.), but we also briefly discuss other mechanisms, such as takeover defenses and fiduciary voting. We provide a broad overview of different areas in this literature and highlight problems of interpretation that may arise because of empirical difficulties. We outline potentially promising areas for future research.

Firms can grow through internal investment or through acquisition. While internal growth takes time, an acquisition provides cash flows immediately. The opportunity to grow internally affects the price of an acquisition as it is a fall-back option for the acquirer should negotiations break down. Assuming investors do not have full information about the time a firm requires to grow internally, acquirers earn positive returns before the announcement of an acquisition, and there are negative stock price reactions to acquisition announcements. This research provides predictions about how pre-announcement price run-up and negative announcement returns relate to integration costs and synergies from acquisition.

Entrepreneurial finance literature has highlighted that institutional investors are the main contributors to private equity funds. This paper complements these findings by documenting that institutional investors also invest directly in private equity. A major concern for such investments is the higher agency costs associated with private equity. We show that institutions invest in private firms with governance mechanisms that tend to reduce the expected agency costs and risk of minority expropriation. Good governance mechanisms further allow institutional investors to enjoy the benefits of syndication and thereby reduce idiosyncratic risk. In addition, we show that institutional investments tend to be followed by further improvements in corporate governance and tend to occur in high-growth firms within research and development intensive industries