We investigate an asset pricing model with preferences cycling between high risk aversion and low EIS in fall/winter and the reverse in spring/summer. Calibrating to consumption data and allowing plausible preference parameter values, we produce returns that match observed equity and Treasury returns across the seasons: risky returns are higher and risk-free returns are lower or stable in fall/winter, and they reverse in spring/summer. Further, risky returns vary more than risk-free returns. A novel finding is that both EIS and risk aversion must vary seasonally to match observed returns. Further, the degree of necessary seasonal change in EIS is small. (JEL E44, G11, G12)

We analyze the costs and benefits of clawback provisions that enable firms to recover incentive compensation from top management if financials are restated. In a simple contracting model, we find that a clawback provision effectively lengthens the horizon of incentives and curbs misreporting. However, such a provision can add noise to the underlying performance measure, reducing managerial effort and firm value. Our empirical tests support the model’s predictions regarding which types of firms are likely to voluntarily use clawback provisions. We also document that clawback provisions are associated with higher reporting quality, greater CEO pay-for-performance sensitivity, and higher CEO compensation.

The 2007–9 financial crisis began with increased uncertainty over funding conditions in money markets. We show that funding uncertainty can explain diverse elements of commercial banks’ behavior during the crisis, including: (i) reductions in lending volumes, balance sheets, and profitability; (ii) more intense competition for retail deposits (including deposits turning into a “loss leader”); (iii) stronger lending cuts by more highly extended banks with a smaller deposit base; (iv) weaker pass-through from changes in the central bank’s policy rate to market interest rates; and (v) a binding “zero lower bound” as well as a rationale for unconventional monetary policy.

Using a large, new database of contractual provisions governing the allocation of cash flow rights in venture capital (VC) financings, we investigate how contract design is related to VC abilities to monitor and provide value-added services to the entrepreneur. We find that more experienced VCs, who have superior abilities and more frequently join the boards of their portfolio companies, obtain weaker downside-protecting contractual cash flow rights than less experienced VCs. Several pieces of evidence suggest that this relation is unlikely to be driven by selection effects. The results suggest that VCs with better governance abilities focus less on obtaining downside protections, which entail risk-sharing costs, and more on other aspects of the contract (such as obtaining board representation) during negotiations with entrepreneurs. The results also imply that previous estimates of the amount entrepreneurs pay for affiliation with high-quality VCs are overstated.

Richard A. Brealey, Ian A. Cooper, Evi Kaplanis; What is the International Dimension of International Finance?, European Finance Review, Volume 3, Issue 1,

There are numerous aspects concerning financial regulation which the current financial turmoil has high-lighted. These include: (1) the form of deposit insurance; (2) bank solvency regimes, ‘prompt corrective action’; (3) Central Banks’ money market operations; (4) commercial bank liquidity risk management; (5) procyclicality of CARs (and mark-to-market); lack of counter-cyclical instruments; (5) boundaries of regulation, conduits, SIVs and reputational risk; (6) crisis management: (a) within countries, e.g. UK Tripartite Committee; or (b) cross-border, how to allocate the burden of cross-border defaults? This paper describes how the crisis exposed regulatory failings, drawing largely on UK experience, and suggests remedies.

Abstract If an individual with expected utility and a reasonable level of wealth rejects a small actuarially favorable gamble, it implies a very high degree of risk aversion. It also predicts (counterfactually) the rejection of more sizable and very attractive bets. If additional background uncertainty affects wealth, this result also applies to non-expected utilities. The authors describe a set of reasonable conditions under which an individual may reject the small bet but accept the large bet, even in the presence of background uncertainty. The two critical assumptions that the authors use are rank-dependent utility and a discrete distribution for background risk. Plausible calibrations can reconcile large/small bet risk attitudes and the empirical evidence on limited stock market participation in the presence of labor income risk.

Abstract This paper examines the expropriation of a foreign investor by a local partner and the subsequent resolution of the case through international arbitration in favor of the investor. Despite the investor's 99% interest in the joint venture, the local partner managed to divert the entire value of the underlying entity for his personal benefit. This clinical examination of an expropriation and its aftermath illustrates the interaction of property and contract rights in a global setting, how corporate control is shaped by geography, and how multinational firms may be advantaged by availing themselves of stronger investor protections than local firms.