[Some argue too-big-to-fail (TBTF) status increases the value of the largest banks. In contrast, we find that the value of the largest banks is negatively related to asset size in normal times, but much less so during the crisis. Further, shareholders lose when large banks cross a TBTF threshold through acquisitions. The negative relation between bank value and bank size for the largest banks cannot be explained by differences in ROA, ROE, equity volatility, tail risk, distress risk, or equity discount rates, but it can be partly explained by the market’s discounting of trading activities.]

[We examine the theoretical predictions that link acquirer returns to diversity of opinion and information asymmetry. Theory suggests that acquirer abnormal returns should be negatively related to information asymmetry and diversity-of-opinion proxies for equity offers but not cash offers. We find that this is the case and that, more strikingly, there is no difference in abnormal returns between cash offers for public firms, equity offers for public firms, and equity offers for private firms after controlling for one of these proxies, idiosyncratic volatility.]

This article proposes a new approach to evaluate contagion in financial markets. Our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions. We characterize the extent of contagion, its economic significance, and its determinants using a multinomial logistic regression model. Applying our approach to daily returns of emerging markets during the 1990s, we find that contagion is predictable and depends on regional interest rates, exchange rate changes, and conditional stock return volatility. Evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed.

[This article investigates the long-term equity performance of Japanese firms issuing convertible debt and equity. We find that issuing firms perform poorly (except for equity rights issues) compared to nonissuing firms even though the stock-price reaction to convertible debt and equity issues is not negative for Japanese firms. This underperformance is strongest for firms issuing public convertible debt. In contrast to the United States, poor performance is not concentrated in smaller firms and in firms with a high market-to-book ratio. Simple behavioral explanations advanced for the new issue puzzle in the United States do not seem consistent with the Japanese experience.]

This article provides a theory of foreign equity investment restrictions. We consider a model where the demand function for domestic shares differs between domestic and foreign investors because of deadweight costs in holding domestic and foreign securities that depend on the country of residence of investors. We show that domestic entrepreneurs maximize firm value by discriminating between domestic and foreign investors. The model implies that countries benefitting from capital flight have binding ownership restrictions such that foreign investors pay a higher price for shares than domestic investors. The empirical implications of this theory are supported by evidence from Switzerland. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

While the Dodd–Frank Act (DFA) mandates board risk committees for large banks, we argue that such committees do not benefit all banks. Banks forced by the DFA to adopt a board risk committee do not experience a reduction in risk following adoption. In contrast, banks that voluntarily established risk committees before the DFA exhibit lower risk, especially when these committees possess greater risk expertise. Using unique interview data, we find that board risk committees serve as active monitors rather than merely rubber-stamping management proposals. However, regulatory-mandated tasks limit their monitoring role.

We develop a positive theory of the hedging behavior of value-maximizing corporations. We treat hedging by corporations simply as one part of the firm's financing decisions. We examine (1) taxes, (2) contracting costs, and (3) the impact of hedging policy on the firm's investment decisions as explanations of the observed wide diversity of hedging practices among large, widely-held corporations. Our theory provides answers to the questions: (1) why some firms hedge and others do not; (2) why firms hedge some risks but not others; and (3) why some firms hedge their accounting risk exposure while others hedge their economic value.

Equity market liberalizations are like IPOs, but they are IPOs of a country's stock market rather than of individual firms. Both are endogenous events whose benefits are limited by poor investor protection, agency costs, and information asymmetries. As for stock prices following an IPO, there are legitimate concerns about the efficiency in the period following the liberalization of the stock market returns of countries that liberalize their equity markets. Equity markets of liberalizing countries experience extremely strong performance immediately after the liberalization, but then go through a period of poor performance. This pattern of stock returns is more dramatic for countries with poorer financial development before the liberalization.

The average cash-to-assets ratio for U.S. industrial firms more than doubles from 1980 to 2006. A measure of the economic importance of this increase is that at the end of the sample period, the average firm can retire all debt obligations with its cash holdings. Cash ratios increase because firms' cash flows become riskier. In addition, firms change: They hold fewer inventories and receivables and are increasingly R&D intensive. While the precautionary motive for cash holdings plays an important role in explaining the increase in cash ratios, we find no consistent evidence that agency conflicts contribute to the increase.

This paper presents evidence that the distribution of target ownership is related to the division of the takeover gain between the target and the bidder for a sample of successful tender offers. In the whole sample, the target's gain is negatively related to bidder and institutional ownership. In the sample of multiple-bidder contests, the target's gain increases with managerial ownership and falls with institutional ownership.