Using several large data sets of mortgage loans originated between 2004 and 2007, we find that in the prime mortgage market, banks generally sold low-default-risk loans into the secondary market while retaining higher-default-risk loans in their portfolios. In contrast, these lenders retained loans with lower prepayment risk relative to loans they sold. Securitization strategy of lenders changed dramatically in 2007 as the crisis set in with most unwilling to retain higher-default-risk loans in return for lower prepayment risk. Contrary to the prime market, the subprime market does not exhibit any clear pattern of adverse selection.

We test several hypotheses on how takeover premium is related to investors' divergence of opinion on a target's equity value. We show that the total takeover premium, the pre-announcement target stock price run-up, and the post-announcement stock price markup are all higher when investors have higher divergence of opinion. We obtain identical results with higher market-level investor sentiment. When divergence of opinion is higher, a firm is less likely to be a takeover target, although takeover synergy in successful takeovers is higher. Our results suggest that takeovers may play a role in explaining high contemporaneous stock prices in the presence of high divergence of investor opinion.

When a firm exercises discretion to disclose or withhold information (strategic disclosure), risk-averse investors command higher expected returns when expected cash flows decrease, producing a negative correlation between these expectations. Moreover, stock returns exhibit stronger reversal than they do when full disclosure is enforced. We propose a model that makes these predictions and provide consistent evidence using a panel of foreign firms that list American Depositary Receipts (ADRs). We find significant shifts in the time-series properties of stock returns for firms that undergo large changes in disclosure environments, such as those cross-listing on the NYSE/AMEX/NASDAQ and those from less-developed/emerging markets and code-law countries.

We show that contractual risk-taking incentives for chief executive officers (CEOs) increased at large U.S. commercial banks around 2000, when industry deregulation expanded these banks’ growth opportunities. Our econometric models indicate that CEOs responded positively to these incentives, especially at the larger banks best able to take advantage of these opportunities. Our results also suggest that bank boards responded to higher-than-average levels of risk by moderating CEO risk-taking incentives; however, this feedback effect is absent at the very largest banks with strong growth opportunities and a history of highly aggressive risk-taking incentives.

Using China’s religion and household survey data, we find that a high degree of religiosity increases households’ willingness to borrow, both formally from financial institutions and informally from family and friends. A high degree of religiosity could facilitate formal household borrowing by fostering trust in transactions. However, the trust mechanism cannot explain the impact of religiosity on informal borrowing. We hypothesize that a strong religiosity might facilitate informal loans by promoting altruism, and we find supporting evidence. The effect of religiosity on informal loans is more pronounced in transactions where the parties involved are intrinsically less altruistic toward each other.

We hypothesize that active mutual funds can promote corporate social responsibility (CSR) in their portfolio firms through stock trading activities. Leveraging mutual fund family mergers to identify causal effects, we find that a firm’s CSR commitment increases when its mutual funds exhibit stronger CSR preferences through trading. This effect is stronger when mutual fund investors are more active or when the firm’s stock exhibits higher liquidity. Additionally, our results suggest that the trading channel complements non-trading mechanisms through which active mutual funds influence firm CSR.

We examine how financial market development affects technological innovation. Using a large data set that includes 32 developed and emerging countries and a fixed effects identification strategy, we identify economic mechanisms through which the development of equity markets and credit markets affects technological innovation. We show that industries that are more dependent on external finance and that are more high-tech intensive exhibit a disproportionally higher innovation level in countries with better developed equity markets. However, the development of credit markets appears to discourage innovation in industries with these characteristics. Our paper provides new insights into the real effects of financial market development on the economy.