The idea that the happiness of an individual depends upon the consumption of others is widely viewed as an important feature of our shared social existence. Recent research in finance has used this idea, through consumption externalities, to explore asset-pricing anomalies. Consumption externalities potentially break the link between Pareto optimality and competitive equilibria and open the door for beneficial government intervention (e.g., Lars Ljungqvist and Harald Uhlig, 2000). In this paper, we delineate two effects that a consumption externality may have. An increase in aggregate consumption may: (a) raise the marginal utility of individual consumption relative to leisure, and/or (b) lower an individual’s utility level. We refer to (a) as “keeping up with the Joneses” (henceforth, KUJ), following Jordi Gali (1994), and we refer to (b) as jealousy. Jealousy is a distinct concept from KUJ. Under KUJ, an individual derives greater utility from additional own consumption relative to leisure when others consume more. At the same time, higher per capita consumption holding fixed individual consumption can trigger either jealousy, so that individual utility falls, or admiration, so that individual utility rises. In Section I of this paper, we show that jealousy implies that the laissez-faire equilibrium consumption level is greater than the optimal level. Whether preferences exhibit KUJ is not necessary for this main result. Intuitively, in the presence of jealousy, consumption is similar to pollution. Overpollution exists because individuals do not take into account the cost of polluting on others, not because an increase in economywide pollution makes the return to individual polluting higher. Similarly, overconsumption exists because individuals do not take into account the negative effect of own consumption on jealous others. Things go in the opposite direction when individuals are admiring. In Section II, we consider a functional form that encompasses several existing models. We show that jealousy determines the optimal tax to correct overconsumption and that KUJ is mainly important for asset pricing.

Nearest neighbor (NN) matching is widely used in observational studies for causal effects. Abadie and Imbens (2006) provided the first large‐sample analysis of NN matching. Their theory focuses on the case with the number of NNs, M fixed. We reveal something new out of their study and show that once allowing M to diverge with the sample size an intrinsic statistic in their analysis constitutes a consistent estimator of the density ratio with regard to covariates across the treated and control groups. Consequently, with a diverging M , the NN matching with Abadie and Imbens' (2011) bias correction yields a doubly robust estimator of the average treatment effect and is semiparametrically efficient if the density functions are sufficiently smooth and the outcome model is consistently estimated. It can thus be viewed as a precursor of the double machine learning estimators.

We present an empirical study of stress testing for portfolios of auto loans. We find that loans aged five years or more have significantly higher default probabilities. This finding raises concerns about the increasing maturity of auto loans in recent years. A challenge in stress testing is the instability of the estimated coefficient of macroeconomic variables, which raises questions on the reliability of stress test results. For this reason, it is important for model developers to perform sensitivity analyses and make conservative adjustment to minimize model risk.

This study examines the spillover effect of constituency statutes along the supply chain. We posit that the enactment of constituency statutes in customer firms’ incorporation states, by removing legal obstacles for customer firms to cater to non-shareholders’ interests, builds suppliers’ trust and cooperation. Consistent with the notion that constituency statutes entice greater trust from suppliers, we find that suppliers make more relationship-specific investments in the supply chain after the enactment of constituency statutes in customers’ states, indicating a greater commitment to the customer. We also show an improvement in customers’ corporate social responsibility performance in the post-constituency-statute period, thus substantiating the claim that the constituency statutes increase customers’ stakeholder orientation. Cross-sectionally, we find the positive effect of constituency statutes on supplier relationship-specific investments is attenuated if the customer and supplier have more repeated interactions in the past, whereas the effect is more pronounced if suppliers produce durable goods. Overall, we provide novel evidence on the spillover of constituency statutes along the supply chain.

This paper investigates the effects of operational hedging on commodity price risks. It explores a novel type of operational hedging, i.e., the natural operational hedge position between upstream crude oil production and downstream activities in the supply chain. Using hand-collected data from 293 unique oil-producing firms, we find that operational hedging is sufficiently effective in reducing firms’ exposure to oil-price risk. We also find an inverse relationship between operational and financial hedging, suggesting that they can substitute for each other.

The average total compensation of directors in U.S.-listed companies was $342,030 in 2020, 5.06 times the median household income. Directors set their own pay, giving rise to potential self-dealing. We argue and document that in the presence of self-dealing, external mechanisms such as legal standards act as effective means of governance. Following a landmark Delaware court ruling that subjected director pay to a more stringent legal standard, Delaware-incorporated firms reduced director compensation relative to non-Delaware firms and experienced positive and non-transient stock price reactions. Our results indicate that proper governance of director compensation enhances firm value.

We propose and estimate a quantitative model of exchange rates in which participants in the foreign exchange market are intermediaries subject to value-at-risk (VaR) constraints. Higher volatility translates into tighter VaR constraints, and intermediaries require higher returns to hold foreign assets. Therefore, the foreign currency is expected to appreciate. The model quantitatively resolves the Backus–Smith puzzle, the forward premium puzzle, and the exchange rate volatility puzzle and explains deviations from the covered interest rate parity. Moreover, the model implies both contemporaneous and predictive relations between proxies of leverage constraint tightness and exchange rates. These implications are supported in the data.

Traditional performance evaluation measures do not account for tail events and rare disasters. To address this issue, we reinterpret the riskiness measures of Aumann and Serrano (2008) and Foster and Hart (2009) as performance indices. We derive the moment properties of these indices and their sensitivity to rare disasters and show that they are consistent with the asset pricing literature. As applications, we show that “anomalous” investment strategies such as “momentum” or investment in private equity lose much of their glamour when accounting for high moments and rare events. Furthermore, using the indices to select mutual funds results in desirable high-moment properties out of sample.

As a part of the ongoing liberalization of the marketplace, Chinese regulators adopted the guideline called “Regulation of Equity Incentive Plans (trial)” to allow firms to provide employee incentives through employee stock option plans. Firms began initiating the plans in 2006. We investigate the impact of these plans on firm performance by comparing option-award firms with similar non-award matching firms. The change in ROE for the option-award firms is significantly higher than the matching firms. This is primarily due to their performance holding up better during the global financial crisis while the matching firms’ performance deteriorates. The stock price of these firms shows a positive reaction to the announcement, but no long-term abnormal returns. The better ROE performance for option-award firms is strong for subsets of the sample that are likely to benefit more from incentivized employees; specifically, privately owned firms, firms with higher board independence, and smaller firms. After various robustness tests, we conclude that the higher performance comes from the employee incentives, rather than earnings manipulation, a replacement of cash compensation, a binding of employees to executives, or gaming vesting periods.

This study examines whether the term of the auditor–client relationship (i.e., auditor tenure) is associated with future stock price crash risk measured both ex ante and ex post. Using a large sample of U.S. public firms with Big 4 auditors, we find robust evidence that auditor tenure is negatively related to one†year†ahead stock price crash risk. The evidence is consistent with monitoring†by†learning where development of client†specific knowledge over the term of the auditor–client relationship enhances auditors’ ability to detect and deter bad news hoarding activities by clients, thereby reducing future crash risk. This result holds even after controlling for endogeneity of the tenure/crash risk relation. We further provide evidence indicating that option market investors do not fully incorporate the information contained in the term of auditor–client relationship in predicting future stock price crash risk. Our empirical results have important policy implications for regulators concerned with ensuring auditor independence.Les auteurs se demandent si la durée de la relation auditeur†client (soit la durée du mandat de l'auditeur) est en relation avec le risque d'effondrement futur du cours des actions, évalué ex ante et ex post. En étudiant un vaste échantillon de sociétés des États†Unis faisant appel public à l’épargne qui ont recours aux services des Quatre Grands cabinets d'audit, ils recueillent des preuves convaincantes que la durée du mandat de l'auditeur est en relation négative avec le risque d'effondrement du cours des actions une année à l'avance. Ces preuves sont conformes à la pratique de la « surveillance par l'apprentissage », le perfectionnement des connaissances relatives au client pendant la durée de la relation auditeur†client améliorant l'aptitude des auditeurs à déceler et prévenir chez les clients le comportement de thésaurisation des mauvaises nouvelles, ce qui a pour effet de réduire le risque d'effondrement futur. Ces résultats persistent même une fois contrôlée l'endogénéité de la relation entre la durée du mandat et le risque d'effondrement. Les auteurs produisent d'autres preuves que les investisseurs sur le marché des options n'incorporent pas entièrement l'information que recèle la durée de la relation auditeur†client dans la prévision du risque d'effondrement futur du cours des actions. Les résultats empiriques de l’étude ont d'importantes conséquences au chapitre des politiques pour les autorités de réglementation soucieuses de l'indépendance des auditeurs.