Corporate bond mutual funds increased their selling of credit protection in the credit default swaps (CDS) market during the 2007–2008 financial crisis. This trading activity was primarily in multi-name CDS, greater among larger and established funds, and directed toward counterparty dealers in financial distress. Funds that sold credit protection during the crisis experienced greater credit market risk and superior post-crisis performance, consistent with higher expected returns from liquidity provision. Funds using Lehman Brothers as a counterparty experienced abnormal outflows and returns of –2% immediately following Lehman's bankruptcy, suggesting that funds’ opportunistic trading in CDS exposed investors to counterparty risk.

We model the interaction of financial constraints, capacity constraints, and the response of production and inventory to cost and demand shocks. The model predicts that in response to favorable shocks, financially constrained firms are unable to build inventory as rapidly as are unconstrained firms. However, because the favorable shocks gradually ease the financial constraints, constrained firms continue to build inventory and eventually carry surplus inventory (relative to unconstrained firms) to unfavorable states. This allows them to deplete inventory more aggressively in response to unfavorable shocks. Our empirical evidence provides broad support for the model’s predictions.Received September 3, 2016; editorial decision January 11, 2018 by Editor David Denis.

This paper explores whether firms manage their earnings after stock splits to meet the raised expectations from the market due to the positive signal sent by the splits. We first document that post-split drift mainly exists in the first three months and is positively associated with post-split standardized unexpected earnings (SUE). However, the higher post-split SUE of split firms is associated with higher discretionary accruals and abnormally lower R&D expenses. This result is consistent with our hypothesis that split firms overstate their post-split earnings by manipulating accruals and reducing R&D spending. Moreover, post-split abnormal returns increase with discretionary accruals and R&D reduction for about six months and tend to reverse over longer horizons, especially for firms with negative pre-split SUE. Overall, our results indicate that the post-split drift is a short-term phenomenon and partly attributable to the earnings management after the splits.

Combining data on locations with career and educational histories of mathematicians, we study how distance and ties affect citation patterns. The ties considered include coauthorship, past colocation, and relationships mediated by advisers and the alma mater. With fixed effects capturing subject similarity and article quality, we find linkages are strongly associated with citation. Controlling for ties generally halves the negative impact of geographic barriers on citations. Ties matter more for less prominent and more recent papers and have retained their quantitative importance in recent years. The impact of distance, controlling for ties, has fallen and is statistically insignificant after 2004.

This article provides a comprehensive examination of the time-series behavior of relationship banks around and during borrower distress. Relationship and outside loans have similar interest rates during distress and even 2 years prior to distress. Relative to outside loans in distress, relationship loans in distress have lower maturity. The fraction of bank lending given by relationship banks reduces during borrower distress. Overall, borrowers in distress do not derive benefits from relationship banks. These findings are inconsistent with models that suggest banks have an implicit commitment to help their borrowers in distress due to reputation concerns.

Drawing on the political theory of judicial decision making, our paper proposes a new and parsimonious ex ante litigation risk measure: federal judge ideology. We find that judge ideology complements existing measures of litigation risk based on industry membership and firm characteristics. Firms in liberal circuits (the third quartile in ideology) are 33.5% more likely to be sued in securities class action lawsuits than those in conservative circuits (the first quartile in ideology). This result is stronger after the U.S. Supreme Court's ruling in the Tellabs case. We next show that the effect of judge ideology on litigation risk is greater for firms with more sophisticated shareholders and with higher expected litigation costs. Furthermore, judicial appointments affect litigation risk and the value of firms in the circuit, highlighting the economic consequences of political appointments of judges. Finally, using our new measure, we document that litigation risk deters managers from providing long‐term earnings guidance, a result that existing measures of litigation risk cannot show.

We study whether, and more importantly, through what mechanisms, quasi-indexers affect portfolio firms’ tax planning by employing the discontinuity in quasi-indexer ownership around the Russell 1000/2000 index cutoff. Using a regression discontinuity design, we find that higher quasi-indexer ownership leads to greater tax saving. With respect to the mechanisms, we find that the greater tax saving is a result of a focus on improved overall firm performance, not a specific focus on improved tax planning. We further find that the documented tax saving effect is partially due to quasi-indexers’ influences on executive equity incentives, corporate governance, and information environment.

We combine national accounts, surveys, and new tax data to study the accumulation and distribution of income and wealth in China from 1978 to 2015. The national wealth-income ratio increased from 350 percent in 1978 to 700 percent in 2015, while the share of public property in national wealth declined from 70 percent to 30 percent. We provide sharp upward revision of official inequality estimates. The top 10 percent income share rose from 27 percent to 41 percent between 1978 and 2015; the bottom 50 percent share dropped from 27 percent to 15 percent. China’s inequality levels used to be close to Nordic countries and are now approaching US levels.

This paper studies the rise and fall of “Mini” options that are especially catered to retail investors for popular but high-priced securities. Using transaction-level data, we find that transaction costs of Mini options are much higher than those of standard options and the difference cannot be fully explained by cost-related determinants. Furthermore, we find evidence of price discrimination against retail investors from analyses of price elasticities of option traders, an event-study of changes in bid-ask spreads around earnings announcements, and comparisons of trade prices paid by Mini and standard option traders for the same security at approximately the same time.

We analyze the expected value of information about an agent's type in the presence of moral hazard and adverse selection. Information about the agent's type enables the principal to sort/screen agents of different types. The value of the information decreases in the variability of output and the agent's risk aversion, two factors that are typically associated with the severity of the moral hazard problem. However, the value of the information about agent type first increases but ultimately decreases in the severity of adverse selection. The decrease comes about because the means available to the principal to induce effort—namely, the pay–performance sensitivity—must also be used to sort/screen agents, and these two goals conflict. This decline in value occurs despite the monotonically increasing importance of the information in determining the principal's expected profits. Further, we show that the peak value of information occurs at a predictable level of adverse selection. These results imply that over some range, the importance of the information will be increasing, and the value of the information will be simultaneously decreasing, in the severity of adverse selection.