Much financial activity is zero-sum. While providing transactional and diversification services to others, participants also prey upon each other. High-ability predators trade opportunistically with less-able prey. In our dynamic model these features amplify real shocks. The presence of more low-ability traders reduces expected losses to high-ability traders, leading to equilibria with high levels of financial activity and employment. Shocks to profits can motivate exit by low-ability traders, rendering those of intermediate skill more vulnerable. Thus, our relatively simple model generates boom-bust dynamics suggestive of Wall Street. (JEL G00, G20, E44)

Diversification by banks affects the systemic risk of the sector. Importantly, Wagner (2010) shows that linear diversification increases systemic risk. We consider the case of securitization, whereby loan portfolios are sliced into tranches with different seniority levels. We show that tranching offers nonlinear diversification strategies, which can reduce the failure risk of individual institutions beyond the minimum level attainable by linear diversification without increasing systemic risk.

Unlike in elementary school, high school teacher effects may be confounded with both selection to tracks and track-level treatments. I document confounding track effects and show that traditional tests for the existence of teacher effects are biased. After accounting for biases, high school algebra and English teachers have smaller test score effects than found in previous studies and value-added estimates are weak predictors of teachers’ future performance. Results indicate that either (a) teachers are less influential in high school than in elementary school or (b) test score effects are a weak measure of teacher quality at the high school level.

In this paper, I examine minority block acquisitions from 1990 to 2009, as well as possible theories for the presence of equity stake purchases. I find that target firms are financially constrained. Acquisitions significantly increase their stock prices at announcement, along with their investment expenditures afterwards. In the two years following the acquisition, 27% (9%) issue new equity (debt) and raise 27% (24%) of their market capitalization. These findings support the theory that equity stakes certify the investment opportunities of target firms. I also find some support for the contracting motive, mostly in countries with good investor protection and a well-performing banking sector.

This study documents a six-fold increase in short-term return reversals during earnings announcements relative to non-announcement periods. Following prior research, we use reversals as a proxy for expected returns market makers demand for providing liquidity. Our findings highlight significant time-series variation in the magnitude of short-term return reversals and suggest that market makers demand higher expected returns prior to earnings announcements because of increased inventory risks that stem from holding net positions through the release of anticipated earnings news. Collectively, our findings suggest that uncertainty regarding anticipated information events elicits predictable increases in the compensation demanded for providing liquidity and that these increases significantly affect the dynamics and information content of market prices.

Extensive regulatory changes and technological advances have transformed banking systems to a great extent. Banks have reacted to the challenges posed by the new operating environment by creating new products and expanding their activities to some uncharted business areas. In this paper, we study how modern banking which gave birth to the off-balance-sheet leverage activities affected the risk profile of U.S. banks as well as the level of systemic risk before and after the onset of the late 2000s financial crisis. Towards this, we separate on- from off-balance-sheet leverage and capture the latter with different, yet complementary, measures which do not exist in the current literature. Special attention is paid on the deleveraging process that occurred in the banking market after the crisis erupted, which is an additional innovative feature of this study. Our findings reveal that leverage, both explicit and hidden off-the-balance-sheet, increases the individual risk of banking firms making them vulnerable to financial shocks. Reverse leverage, on the other hand, is beneficial for individual banks’ health, but is found to be harmful for financial stability. We also demonstrate that the banks which concentrate on traditional lines of business typically carry less risk compared to those involved with modern financial instruments.

We model the risk of setting the required fixed-offer price in an IPO given initial uncertainty about value, as well as costs of over and underpricing. Assuming that the goal of issuers in bookbuilt IPOs is to maximize net offering proceeds, our analysis indicates that their optimal strategy is to negotiate a relatively small spread, consistent with material underpricing. Similarly, considering the expected costs of overpricing makes the underpricing of best-efforts IPOs in the interest of issuers. Our results rely on neither asymmetric information nor agency costs and provide support for Hansen's (2001) nearly-optimal “conventional” spread and the view that it evolved from adaptive, imitative behavior, consistent with Alchian's (1950) explanation of how economic players evolve practices to survive under uncertainty and incomplete information, as well as Alchian's (1969) work on how fixed prices and queues can efficiently clear product markets.