This article studies how early-stage entrepreneurs respond to negative feedback about the quality of their ventures. We use data from new venture competitions, some of which privately inform founders of their relative rank. The empirical strategy compares lower and higher ranked losers across competitions in which they did and did not observe their standing. Receiving negative feedback increases average venture abandonment by 13%. Differences in responsiveness—for example, in venture risk, venture maturity, and signal precision—are consistent with particular theories about entrepreneurship, including the importance of experimentation.

Many classes of microstructure models, as well as intuition, suggest that it should be easier to trade when markets are more active. In the data, however, volume and liquidity seem unrelated over time. This paper offers an explanation for this fact based on a simple frictionless model in which liquidity reflects the average risk-bearing capacity of the economy and volume reflects the changing contribution of individuals to that average. Volume and liquidity are unrelated in the model, but volume is positively related to the variance of liquidity, or liquidity risk. Empirical evidence from the U.S. government bond and stock markets supports this new prediction.

Defenders of market efficiency argue that anomalies involving long-term abnormal returns are not robust to alternative methodologies. We argue that because various methodologies use different weighting schemes, the magnitude of abnormal returns should differ, and in a predictable manner. Three problems are identified that cause low power in value-weighted three-factor time series regressions when abnormal returns following managerial actions are being estimated. We illustrate the sensitivities in the context of the new issues puzzle as well as with simulations. More generally, multifactor models as currently used do not, and cannot, test market efficiency.

We examine the determinants and implications of holdings of cash and marketable securities by publicly traded U.S. firms in the 1971–1994 period. In time-series and cross-section tests, we find evidence supportive of a static tradeoff model of cash holdings. In particular, firms with strong growth opportunities and riskier cash flows hold relatively high ratios of cash to total non-cash assets. Firms that have the greatest access to the capital markets, such as large firms and those with high credit ratings, tend to hold lower ratios of cash to total non-cash assets. At the same time, however, we find evidence that firms that do well tend to accumulate more cash than predicted by the static tradeoff model where managers maximize shareholder wealth. There is little evidence that excess cash has a large short-run impact on capital expenditures, acquisition spending, and payouts to shareholders. The main reason that firms experience large changes in excess cash is the occurrence of operating losses.

This paper uses commercial aircraft transactions to determine whether prices obtained from asset sales are greater under Chapter 11 reorganization than under Chapter 7 liquidation. Results indicate that prices obtained under both bankruptcy regimes are substantially lower than prices obtained by non-distressed airlines. Furthermore, there is no evidence that prices obtained by firms reorganizing under Chapter 11 are greater than those obtained by firms liquidating under Chapter 7. An analysis of aircraft sales indicates that Chapter 11 is also ineffective in limiting the number of aircraft sold at discounted prices.

In this paper we examine tender offer share repurchases to differentiate between the information signaling and free cash flow hypotheses. Previous work in this area has focused on announcement period returns. While we also examine announcement returns, our primary emphasis is on operating performance changes surrounding repurchases. We argue that the information contained in changes in operating performance, and its determinants, enables us to differentiate between the two hypotheses. Our primary finding is that operating performance following repurchases improves only in low-growth firms, and that these gains are generated by more efficient utilization of assets, and asset sales, rather than improved growth opportunities. Thus, repurchases do not appear to be pure financial transactions meant to change the firm's capital structure but are part of a restructuring package meant to shrink the assets of the firm. This evidence leads us to conclude that the positive investor reaction to repurchases is best explained by the free cash flow hypothesis.

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.

We provide evidence consistent with firm managers opportunistically defining non-GAAP earnings in order to meet or beat analyst expectations. This result is robust to controlling for other tools of benchmark beating (e.g., discretionary accruals, real earnings management, and expectation management). We also find that managers tend to exclude more expenses from non-GAAP earnings when it is costlier to use accrual earnings management due to balance sheet constraints, indicating that these tools are substitutes. Lastly, we find that investors discount positive earnings surprises when accompanied by exclusions from GAAP earnings, suggesting that the market partially understands the opportunistic nature of these exclusions. Our evidence is consistent with managers opportunistically defining non-GAAP earnings in a way that analysts fail to fully anticipate, resulting in an increased likelihood of exceeding analyst forecasts.

We provide a solution to the informed-principal problem in the independent private values setting with monetary transfers. The principal's private information creates signaling considerations that may distort the implemented allocation. We show that there is no distortion: all principal types implement an allocation that is optimal for the principal ex ante, before he/she learns his/her type. As an application, we consider settings with linear utility. For bilateral exchange in which the principal is one of the traders, the solution is a combination of a participation fee, a buy-out option for the principal, and a resale stage with posted prices.