We study the role of financial strength on product market competition by examining exogenous shocks to a firm’s liability structure arising from asbestos litigation. We find that exogenous increases (decreases) in asbestos liabilities are interpreted by the market as negative (positive) news for a firm’s close competitors. These reactions are magnified in events in which one asbestos-tainted firm goes bankrupt and other asbestos-tainted stocks fall on the news of the bankruptcy. For smaller competitors, market reactions are more pronounced in more concentrated industries. Our findings support the general hypothesis that increases in fixed liabilities lead to more aggressive product market interactions.

The success of any treatment plan depends on how completely the problems it targets have been diagnosed. The precrisis bubble in securitization can be traced to incentive conflict that allows national safety nets to subsidize leveraged risk-taking. Safety-net subsidies encouraged regulation-induced innovations that enabled firms to take hard-to-monitor risks and to make themselves politically, administratively, and economically difficult for government officials to fail and unwind. This paper summarizes the incentive conflicts that led creditors and internal and external supervisors to short-cut and outsource due diligence. The Dodd-Frank strategy of reform does not adequately acknowledge or address these conflicts. The key step needed is to develop an effective statistical metric for measuring the ex ante value of safety-net support in the aggregate and at individual institutions. To accomplish this, government and industry need to rethink the informational obligations that insured financial institutions and their regulators owe to taxpayers as de facto investors and to change the way that information on industry balance sheets and risk exposures is reported, verified, and used. Without reforms in the practical duties imposed on industry and governmental officials and in the way these duties are enforced, financial safety nets will continue to expand and their expansion will undermine financial stability by generating large rewards for creative and aggressive risk-takers that are smart enough to cash in their share of safety-net benefits before they evaporate.

[By buying convertibles and shorting the underlying stock, hedge funds distribute equity exposure to well-diversified shareholders. We find that firms with characteristics that make seasoned equity offerings expensive are more likely to issue convertibles to hedge funds. We conclude that hedge funds provide opportunities for firms to issue convertible securities at a lower cost than seasoned equity by serving as relatively low-cost distributors of equity exposure. A higher fraction of a convertible is privately placed with hedge funds when institutional ownership, stock liquidity, issue size, concurrent stock repurchases, and limitations on callability suggest that shorting costs will be lower.]

We examine whether vocal markers of cognitive dissonance are useful for detecting financial misreporting. We use speech samples of CEOs during earnings conference calls, and generate vocal dissonance markers using automated vocal emotion analysis software. We begin by assessing construct validity for the software‐generated dissonance markers by correlating them with four dissonance‐from‐misreporting proxies obtained in a laboratory setting. We find a positive association between these proxies and vocal dissonance markers generated by the software, suggesting the software's dissonance markers have construct validity. Applying the software to CEO speech, we find that vocal dissonance markers are positively associated with the likelihood of irregularity restatements. The diagnostic accuracy levels are 11% better than chance and of similar magnitude to models based solely on financial accounting information. Moreover, the association between vocal dissonance markers and irregularity restatements holds even after controlling for financial accounting and linguistic‐based predictors. Our results provide new evidence on the role of vocal cues in detecting financial misreporting.

This paper examines granularity adjustments to parameter estimators in a default risk model with cohorts. The model is an extension of the Vasicek model (Vasicek, 1991) and includes a general factor and cohort specific factors. The granularity adjustments derived in the paper concern the mean and/or the variance of observed default frequencies and are easy to implement in practice. For illustration, the method is applied to the S&P corporate ratings. The Granularity Adjusted (GA) estimators are compared to the unadjusted estimators in terms of their asymptotic properties and in finite sample.

We examine aggregate idiosyncratic volatility in 23 developed equity markets, measured using various methodologies. We find no evidence of upward trends after extending the sample to 2008. Instead, idiosyncratic volatility is well described by a stationary autoregressive process that occasionally switches into a higher-variance regime that has relatively short duration. We also document that idiosyncratic volatility is highly correlated across countries. Most of the time variation in idiosyncratic volatility can be attributed to variation in a growth opportunity proxy, total (U.S.) market volatility, and in most specifications, the variance premium, a business cycle sensitive risk indicator.

We document significant “time series momentum” in equity index, currency, commodity, and bond futures for each of the 58 liquid instruments we consider. We find persistence in returns for one to 12 months that partially reverses over longer horizons, consistent with sentiment theories of initial under-reaction and delayed over-reaction. A diversified portfolio of time series momentum strategies across all asset classes delivers substantial abnormal returns with little exposure to standard asset pricing factors and performs best during extreme markets. Examining the trading activities of speculators and hedgers, we find that speculators profit from time series momentum at the expense of hedgers.