We study block trades in the corporate bond market, where dealers buy or sell blocks from initiating customers and offset their positions with receiving investors. Our findings indicate that while receivers benefit from trading cost savings, they primarily bear adverse selection costs and experience worse outcomes when informed trading is prevalent. Mandatory trade reporting improves receiver outcomes by revealing dealers’ private information, but the benefits are reduced when reporting is delayed. Our results emphasize the importance of transparency regime design and suggest potential market fragility: if information asymmetry becomes severe, receivers may withdraw from the block market.

Industry competition shocks are major drivers of mergers and acquisitions (M&A). We document strong positive effects of competition shocks on M&A-related covenant redesign. Acquiring firms in high-competition environments are significantly more likely to undertake tender offer bond repurchases and reduce restrictions on mergers, investments, payouts, and financing, but increase change-in-control covenants. This effect is stronger for larger, more profitable firms. Moreover, announcement returns from M&A transactions of redesigning firms in more competitive settings are significantly higher, while acquisition deal premiums are lower. Our study shows the significant effect of industry competition shocks on debt recontracting in M&A.

We find that capital investment and net debt issuance of large firms are, on average, more sensitive to industry business cycles than those of small firms, in stark contrast to the effect of size on investment sensitivity to macroeconomic cycles. We theoretically examine the role of firm size on firms’ responses to industry shocks. Consistent with our theoretical predictions, we find that large firms exhibit greater sensitivity to industry cycles than small firms in their investment and net debt issuance only in industries with low cyclical variability of markups and production growth, high fixed cost intensity, high market-to-book, and high markups.

We analyze effects of tacit collusion in a dynamic general equilibrium model of oligopolistic sectors with capital investment and real frictions. Through their effects on equilibrium- and off-equilibrium stock prices, fundamental shocks affect incentives for defection from tacit collusion, amplifying the interaction between the real economy and financial markets as well as firms’ risk exposure. The model implies ambiguous relationship between industry concentration and equity returns depending on operating leverage, which helps reconcile conflicting evidence in the literature. We find quantitative and empirical support for novel theoretical predictions regarding the effects of concentration on returns and investment.

Security prices are affected by information strategically disclosed by managers as well as by informed trading of outsiders and vice versa. However, market frictions, such as short‐selling costs and constraints, significantly affect trading in financial markets. In this article, we examine the joint determination of voluntary disclosure, security prices, and short‐selling, and address the following issues: How do major market frictions affect managerial disclosures? How do disclosures influence strategic informed trading in the presence of frictions? What does the interaction of strategic disclosure and informed trading imply for price efficiency? We find that short‐selling (trading) costs have a substantial impact on the equilibrium disclosure policy and its interaction with informed trading and price efficiency. Because of endogenously binding short‐sale constraints, better‐informed traders can either deter or encourage disclosure, thus reconciling mixed available evidence on the relation between short‐sale constraints and managerial disclosure. Furthermore, price efficiency need not improve with managers' information endowment because greater disclosure can endogenously inhibit informed short‐selling in equilibrium. Our analysis also generates novel empirical predictions relevant to the literature on managerial disclosure, shorting, and price efficiency.

We study how risk management through hedging affects firms and competition among firms in the life insurance industry, an industry with over 7 trillion in assets and over 1,000 private and public firms. We examine firms after a staggered state-level reform that reduces the costs of hedging by granting derivatives superpriority in case of insolvency. We show that firms that are likely to face costly external finance increase hedging and reduce risk and the probability of receivership. Firms that are likely to face costly external finance also lower prices, increase policy sales, and increase their market share post-reform.

Firms increasingly borrow via sustainability-linked loans (SLLs), contractually tying spreads to their ESG performance. SLLs vary widely in transparency of disclosure regarding sustainability-related contract details and tend to be issued to borrowers with superior ESG profiles. While high-transparency SLL borrowers maintain this performance, low-transparency SLL borrowers exhibit significantly deteriorating ESG performance after issuance. Both high- and low-transparency borrowers pay substantial fees to obtain SLLs. The results are consistent with high-transparency borrowers using SLLs to “certify” their preexisting ESG commitments, but low-transparency borrowers “greenwashing” with empty SLL labels. Evidence on drawdowns, renegotiations, and stock market reactions further supports these interpretations.

We conduct a randomized controlled trial to evaluate the effect of an innovative police patrol program on sexual harassment in public spaces in Hyderabad, India. In collaboration with the Hyderabad City Police, we randomize exposure to police patrols and the visibility of officers by deploying both uniformed and undercover officers across 350 hot spots. To assess the effect, we implement a novel, high-frequency observation exercise to measure sexual harassment at these hot spots, where enumerators recorded all observed instances of sexual harassment and women’s responses in real time. We find that although police patrols had no effect on overall street harassment, uniformed police patrols reduced severe forms of harassment (forceful touching, intimidation) by 27% and reduced the likelihood of women leaving the hot spot due to sexual harassment. We uncovered the underlying mechanisms and found that both police visibility and officers’ attitudes toward sexual harassment are key to understanding its incidence.

This article studies the impact of fractional integration on volatility modelling and option pricing. We propose a general discrete-time pricing framework based on affine multi-component volatility models that admit ARCH( ∞ ) representations. This not only nests a large variety of option pricing models from the literature, but also allows for the introduction of novel covariance-stationary long-memory affine GARCH pricing models. Using an infinite sum characterization of the log-asset price’s cumulant generating function, we derive semi-explicit expressions for the valuation of European-style derivatives under a general variance-dependent stochastic discount factor. Moreover, we carry out an extensive empirical analysis using returns and S&P 500 options over the period 1996–2019. Overall, we find that once the informational content from options is incorporated into the parameter estimation process, the inclusion of fractionally integrated dynamics in volatility is beneficial for improving the out-of-sample option pricing performance. The largest improvements in the implied volatility root-mean-square errors occur for options with maturities longer than one year, reaching 28% and 18% when compared to standard one- and two-component short-memory models, respectively.