We study the market for ratings agencies in the commercial mortgage backed securities sector leading up to and including the financial crisis of 2007–2008. Using a structural model adapted from the auctions literature, we characterize the incentives of ratings agencies to distort ratings in favor of issuers. We find an important equilibrium distortion, which decreased after the crisis. We study several counterfactual experiments motivated by recent policymaking in this industry.

We derive a model with qualitative implications for options pricing under counterparty credit risk and provide empirical evidence using the data from the Hong Kong derivatives market during 2005–2014. We find that the log-price difference between a derivative warrant with counterparty credit risk and an otherwise identical option without counterparty credit risk is significantly and negatively associated with the credit default swap spread on the warrant issuer. We also find that the prices of out-of-the-money put warrants are more sensitive to credit risk than those of other warrants. Our results show counterparty credit risk matters for derivative pricing.

Using within-loan estimations to remove the impact of demand-side factors, we find that the capital levels of banks participating in the same syndicated loan are positively associated with the banks’ contributions to the loan. Consistent with the argument that higher capital reduces the cost of uninsured debt, the positive effect of bank capital on lending is stronger among banks that rely more on wholesale funding. Furthermore, we find that banks increase their contributions to syndicated loans after receiving Troubled Asset Relief Program (TARP) funding. Taken together, we provide new evidence on the importance and causal effect of bank capital on lending.

This paper investigates whether maintaining a reputation for consistently beating analysts' earnings expectations can motivate executives to move from “within GAAP” earnings management to “outside of GAAP” earnings manipulation. We analyze firms subject to SEC enforcement actions and find that these firms consistently beat analysts' quarterly earnings forecasts in the three years prior to the manipulation period and continue to do so by smaller “beats” during the manipulation period. We find that manipulating firms beat expectations around 86 percent of the time in the 12 quarters prior to the manipulation period (versus 75 percent for control firms) and that manipulation often ends with a miss in expectations. We document that executives of manipulating firms face strong stock market and CEO pressure to perform. Prior to the manipulation period, these firms have high analyst optimism, growing institutional interest, and high market valuations, along with powerful CEOs. Further, we find that maintaining a reputation for beating expectations is more important than CEO overconfidence and is incremental to CEO equity incentives for explaining manipulation. Our results suggest that pressure to maintain a reputation for beating analysts' expectations can encourage aggressive accounting and, ultimately, earnings manipulation.

We present results of a randomized trial testing alternative approaches of mapping student achievement into rewards for teachers. Teachers in 216 schools in western China were assigned to performance pay schemes where teacher performance was assessed by one of three different methods. We find that teachers offered “pay-for-percentile” incentives outperform teachers offered simpler schemes based on class-average achievement or average gains over a school year. Moreover, pay-for-percentile incentives produced broad-based gains across students within classes. That teachers respond to relatively intricate features of incentive schemes highlights the importance of paying close attention to performance pay design.