[This theory can explain why bank debt is universally senior, consistent with the presence of conflict (lawyers) and absolute priority violations in financial distress: Better organized banks would more strongly contest priority in financial distress if they were junior. Because "deterrence" can reduce creditors' total expenses in a priority contest, the ex post stronger lobbyist/litigant should be senior ex ante. For equivalent reasons, the theory can advise when public debt should be senior to trade credit and/or implicit contracts, and can even suggest one rationale for the absolute priority rule (APR). This article further shows that Chapter 11 creditor reimbursement procedures can lower overall costs.]

When IPO shares are sold sequentially, later potential investors can learn from the purchasing decisions of earlier investors. This can lead rapidly to "cascades" in which subsequent investors optimally ignore their private information and imitate earlier investors. Although rationing in this situation gives rise to a winner's curse, it is irrelevant. The model predicts that: (1) Offerings succeed or fail rapidly. (2) Demand can be so elastic that even risk-neutral issuers underprice to completely avoid failure. (3) Issues with good inside information can price their shares so high that they sometimes fail. (4) An underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market.

[Our article comprehensively reexamines the performance of variables that have been suggested by the academic literature to be good predictors of the equity premium. We find that by and large, these models have predicted poorly both in-sample (IS) and out-of-sample (OOS) for 30 years now; these models seem unstable, as diagnosed by their out-of-sample predictions and other statistics; and these models would not have helped an investor with access only to available information to profitably time the market.]

[Announcements of successful leveraged buyouts (LBOs) during January 1985 to April 1989 caused a significantly negative return on outstanding publicly traded nonconvertible bonds. Yet the average risk-adjusted debt holder losses are less than 7 percent of the average risk-adjusted equity holder gains. Bond losses are related to the pre-LBO rating, but only weakly to equity holder gains. We demonstrate that trader-quoted data from a major investment bank offers conclusions about the effects of LBOs on debt holders different from those drawn from commonly used matrix and exchange-based data (such as Standard & Poor's Bond Guide data). This has important implications for event studies involving debt instruments.]

We show that discrimination can occur even when it is common knowledge that underlying group characteristics do not differ and when employers do not prefer same-group candidates. When employers can judge job applicants' unknown qualities better when candidates belong to the same group and hire the best prospect from a large pool of applicants, the top applicant is likely to have the same background as the employer. The model has policy, empirical, and experimental implications. For example, the model predicts that "screening discrimination" is more likely to occur and persist in sectors in which underlying quality is important but difficult to observe, there are numerous applicants, interviewing (screening) is relatively cheap, and applicants have to acquire job-specific skills.

This paper presents an IPO signaling model in which some issuers signal their higher quality not only by underpricing their IPO more, but also by waiting more patiently before they sell the remainder of the firm in a seasoned equity offering (SEO). In contrast to earlier models, this model offers empirical predictions (including functional forms) on easily observable variables: the IPO underpricing, after-market returns (reflecting the issuer's actions), and the timing of the SEO. The paper can thus calibrate and better test the theory. The evidence is that [a] signaling high-quality issuers are worth 2–3 times more than non-signaling low-quality firms; [b] the market recognizes the true quality of a firm with probability 30% per year; and [c] patience (i.e. waiting for extra funding) costs issuers about 15% of their value each year.

This study examines initial public offering contract choice decisions. In best-efforts offerings, minimum sales constraints allow issuers to precommit to withdraw the offering if a fixed minimum number of shares is not sold. In firm-commitment offerings, the over-allotment option allows the underwriter to increase sales when demand is strong. Two theories of contract choice–Benveniste and Spindt (1989) and Ritter's (1987) extension of Rock (1986)–offer predictions about the role of these contract features. We find that the 1977–1982 evidence is consistent with Benveniste and Spindt (1989). The evidence is less supportive of the Ritter (1987) hypothesis that minimum sales constraints serve to reduce the winner's curse of the riskier issuers.

The paper shows that the buy or sell recommendations of security analysts have a significant positive influence on the recommendations of the next two analysts. This influence can be traced to short-lived information in the most recent revisions. In contrast, the influence of the prevailing consensus is not stronger if the consensus accurately forecasts subsequent stock price movements. This indicates consensus herding consistent with models in which analysts herd based on little information. The consensus also has a stronger influence when market conditions are favorable. The resulting poorer information aggregation could cause bull markets to be intrinsically more “fragile” (e.g., Bikhchandani et al., J. Political Economy 100(5) (1992) 992–1026).

This paper quantitatively analyzes referee recommendations at eight prominent economics and finance journals, and the SFS (Society for Financial Studies) Cavalcade Conference, where a known algorithm matched referees to submissions. The behavior of referees was similar in all venues. The referee-specific component in the disposition recommendation was about twice as important as the common component. Referees differed both in their scales (some referees were intrinsically more generous than others) and in their opinions of what a good paper was (they often disagreed about the relative ordering of papers).

This theory can explain why bank debt is universally senior, consistent with the presence of conflict lawyers) and absolute priority violations in financial distress: better organized banks would more strongly contest priority in financial distress if they were junior. Because "deterrence can reduce creditors' total expenses in a priority contest, the ex post stronger lobbyist/litigant should be senior ex ante. For equivalent reasons, the theory can advise when public debt should be senior to trade credit and/or implicit contracts, and can even suggest one rationale for the absolute priority rule (APR). This article further shows that Chapter HI creditor reimbursement procedures can lower overall costs. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.