We present a dynamic, continuous-time model in which risk averse inside equityholders set a bank’s lending, payout, and financing policies, and the exposure of bank assets to crashes. We examine whether bailouts encourage excessive lending and risk taking compared to liquidation or bail-ins with debt-to-equity conversion or debt write-downs. The effects of the prevailing insolvency resolution mechanism (IRM) on the probability of insolvency, loss in default, and the bank’s value suggest no single IRM is a panacea. We show how a bailout fund financed through a tax on bank dividends resolves bailouts without public money and without distorting insiders’ incentives.

Managers often face the choice between promoting an internal employee and hiring an external candidate. Using an interactive experiment, we examine the drivers of managers’ promote/hire decisions and internal employees’ behavior before and after those decisions. Consistent with gift exchange theory, we find that employees exert costly effort to increase the chance of being promoted, and they raise their effort level as the promote/hire decision becomes imminent. Managers respond by promoting those who exert high effort, despite employees’ inferior ability compared to external candidates. Results suggest that managers view employees’ past effort as both a gift to reciprocate and a signal of their future effort. Moreover, we find that managers are more likely to promote internally rather than hire externally under a less precise performance measurement system, and this result is driven by managers who observe low employee output. Finally, we find that total effort is significantly higher when managers promote internally versus hire externally.

We present evidence on the effects of target firms' accounting conservatism in a merger and acquisition transaction. Conservatism is distinct from other accounting or accrual quality constructs examined in prior work. Its unique features can lead to potential benefits for both the targets and the acquirers. The use of conservatism by targets reduces acquirers' risks of acquiring underperforming assets or overpaying for well‐performing assets. In addition, targets' conservatism results in greater production of verifiable information that can help the acquirers better estimate and realize synergies of the combined firm. Consistent with these arguments, we find that firms with greater accounting conservatism are more likely to receive a bid. We also find that targets' conservatism increases the deal premium and the announcement returns of both the targets and the acquirers, respectively. Overall, these results indicate that conservatism provides benefits to both sellers and buyers of equity in an acquisition transaction.

This study examines whether the proportion of equity-based compensation in outside director compensation is associated with corporate strategic alliances. We hypothesize that equity incentives provided to outside directors mitigate potential agency conflicts between outside directors and shareholders that arise from the strategic alliance decision-making process, thus resulting in more alliance activities. Our empirical evidence indicates that the percentage of equity in outside director compensation is positively associated with the incidence and the number of strategic alliance activities. Additionally, when the proportion of outside directors' equity in total compensation is higher, firms with strategic alliances generate better future stock returns. Overall, our findings suggest that providing equity incentives in outside director compensation mitigates the agency problems inherent in corporate strategic alliance decisions and enhances the quality of alliance activities.

Audit firms hesitate to take full advantage of data and analytics (D&A) audit approaches because they lack certainty about how external reviewers evaluate those approaches. We propose that external reviewers use an effort heuristic when evaluating audit quality, judging less effortful audit procedures as lower quality, which could shape how external reviewers evaluate D&A audit procedures. We conduct two experiments in which experienced external reviewers evaluate one set of audit procedures (D&A or traditional) within an engagement review, while holding constant the procedures' level of assurance. Our first experiment provides evidence that external reviewers rely on an effort heuristic when evaluating D&A audit procedures—they perceive D&A audit procedures as lower in quality than traditional audit procedures because they perceive them to be less effortful. Our second experiment confirms these results and evaluates a theory‐based intervention that reduces reviewers' reliance on the effort heuristic, causing them to judge quality similarly across D&A and traditional audit procedures.

Tax-qualified vehicles have helped U.S. private-sector workers accumulate $33Tr in retirement plans. An often-overlooked important institutional feature shaping decumulations from these plans is the “Required Minimum Distribution” (RMD) regulation requiring retirees to withdraw a minimum fraction from their retirement accounts or pay excise taxes on withdrawal shortfalls. Our calibrated lifecycle model measures the impact of RMD rules on heterogeneous households’ financial behavior during their work lives and in retirement. The model shows that reforms delaying or eliminating the RMD rules have little effect on consumption profiles, but they would influence withdrawals and tax payments for households with bequest motives.

Black and Hispanic homeowners pay significantly higher mortgage interest rates than white and Asian homeowners. We show that the main reason is that white and Asian borrowers are much more likely to exploit periods of falling interest rates by refinancing their mortgages or moving. Black and Hispanic borrowers face challenges refinancing because, on average, they have lower credit scores, equity and income. But even holding those factors constant, Black and Hispanic borrowers refinance less, suggesting that other factors are at play. Because they are more likely to exploit lower interest rates, white borrowers benefit more from monetary expansions. Policies that reduce barriers to refinancing for minority borrowers and alternative mortgage contract designs can reduce racial mortgage pricing inequality.

Upon the revelation of corporate misconduct by firms in their portfolios, institutional investors experience a significant discount in the market value of their portfolios, excluding misconduct firms, creating a short-term spillover that averages $92.7 billion losses per year. We examine an expansive set of channels under which this spillover to nontarget firms can occur, and find that it reflects the loss of the embedded value of monitoring by a common institutional owner, enforcement wave activity, and industry peer and business relationships. Institutional investors also experience a significant abnormal outflow of funds in the year following the misconduct event.

We develop an asset pricing model with endogenous corporate policies that explains how inflation jointly affects real asset prices and corporate default risk. Our model includes two empirically founded nominal rigidities: fixed nominal debt coupons (sticky leverage) and sticky cash flows. These two frictions result in lower real equity prices and credit spreads when expected inflation rises. A decrease in expected inflation has opposite effects, with even larger magnitudes. In the cross-section, the model predicts that the negative impact of higher expected inflation on real equity values is stronger for low leverage firms. We find empirical support for the model’s predictions.

Does financing respond to changes in productive opportunities, even for the world’s poor? We answer this question by examining the response of private bank financing to an infrastructure program that brought road access to unconnected Indian villages. This program prioritized roads for villages above specific population thresholds, allowing us to exploit the resultant discontinuities for identification. Using detailed data from a large bank, we find that 75% more villagers get loans, and the average amount lent to them is 30%–35% higher, in villages just above these thresholds. District-level analyses further suggest that roads and loans are complements in the growth process.