Research in finance and macroeconomics has routinely employed multiple horizons to test asset return predictability. In a simple predictive regression model, we find the popular scaled test can have zero power when the predictor is not sufficiently persistent. A new test based on implication of the short-run model is suggested and is shown to be uniformly more powerful than the scaled test. The new test can accommodate multiple predictors. Compared with various other widely used tests, simulation experiments demonstrate remarkable finite-sample performance. We reexamine the predictive ability of various popular predictors for aggregate equity premium.

This paper examines the impact of geographic technological diversification on firm innovativeness. Our empirical study conducted on a panel of U.S. manufacturing companies shows that firms with geographic technological diversification are more innovative (as measured by both patents and citations) than firms without. Furthermore, we find that the positive relation between geographic technological diversification and firm innovation is driven by domestic technological diversification, while international technological diversification is negatively related to firm innovation. Our valuation tests further confirm the detrimental effect of international technological diversification on shareholder wealth.

We examine the relative importance of observed and unobserved firm- and manager-specific heterogeneities in determining executive compensation incentives and firm policy, risk, and performance. First, we decompose executive incentives into time-variant and time-invariant firm and manager components. Manager fixed effects supply 73% (60%) of explained variation in delta (vega). Second, controlling for manager fixed effects alters parameter estimates and corresponding inference on observed firm and manager characteristics. Third, larger CEO delta (vega) fixed effects predict better firm performance (riskier corporate policies and higher firm risk). These results suggest that the delta (vega) fixed effect captures managerial ability (risk aversion). (JEL G3, G32, G34, J24, J31, J33) Received September 7, 2018; editorial decision February 21, 2020 by Editor Andrew Ellul.

This paper presents evidence that information asymmetry increases equity misvaluation by showing the impact of analyst coverage on misvaluation. To establish the causality, I use two exogenous events (broker closures and mergers), as well as an instrumental variable approach. The identification strategies indicate that there is a negative causal effect of analyst coverage on equity misvalutaion. The evidence is consistent with the hypothesis that information environment can cause investors to use their perceived value in cash flow and discount rate to estimate their perceived equity prices, which deviate from intrinsic value.

We examine the value and efficiency of analyst recommendations through the lens of capital market anomalies. We find that analysts do not fully use the information in anomaly signals when making recommendations. Analysts tend to give more favorable consensus recommendations to stocks classified as overvalued and, more important, these stocks subsequently tend to have particularly negative abnormal returns. Analysts whose recommendations are better aligned with anomaly signals are more skilled and elicit stronger recommendation announcement returns. Our findings suggest that analysts’ biased recommendations could be a source of market friction that impedes the efficient correction of mispricing.

This paper examines whether the certification effect of VCs extends to firm's potential customers, and whether, by certifying firms' values to potential customers, VCs provide value to firms. Using weekly trading data from P2P lending platforms in China, we find that the amount of loans facilitated and the number of lenders increase significantly by 25.7% and 49.3%, respectively, immediately after announcements that P2P lending platforms obtain VC investment. We find that this certification effect increases with measures of VC reputation and measures of information asymmetry between P2P lending platforms and potential customers. A difference-in-differences analysis provides consistent results, which are robust after controlling for the effects of news, advertising, and funding. We also document that VC-backed platforms are less likely to default than non-VC-backed platforms. This result provides indirect evidence that VC backing has long-term benefits beyond the news and advertising effects.

Using a large panel of more than 140,000 state-owned enterprises (SOEs), this study examines SOEs’ investment behavior surrounding 82 national elections in 25 European countries between 2001 and 2015. We find that SOEs increase their corporate investment by about 29% of the sample average during national election years. This effect is more pronounced in fixed timing and closely contested elections. The effect is also stronger in countries with low institutional quality, more centralized political systems, and state-controlled banking systems. In contrast, we find the matched non-SOEs significantly decrease their corporate investment during national election years.

In March 2020, banks faced the largest increase in liquidity demands ever observed. Firms drew funds on a massive scale from preexisting credit lines in anticipation of cash flow and financial disruptions stemming from the advent of the COVID-19 crisis. The increase in liquidity demands was concentrated at the largest banks, who serve the largest firms. Precrisis financial condition did not constrain large banks’ liquidity supply. Coincident inflows of funds from both the Federal Reserve’s liquidity injection programs and depositors, along with strong preshock bank capital, explain why banks were able to accommodate these liquidity demands. (JEL G21, G28) Received June 7, 2020; editorial decision June 23, 2020 by Editor Isil Erel.

A common prediction of macroeconomic models of credit market frictions is that the tightness of financial constraints is countercyclical. Theory suggests a negative collateralizability premium; that is, capital that can be used as collateral to relax financial constraints insures against aggregate shocks and commands a lower risk compensation compared with noncollateralizable assets. We show that a long-short portfolio constructed using a novel measure of asset collateralizability generates an average excess return of around 8% per year. We develop a general equilibrium model with heterogeneous firms and financial constraints to quantitatively account for the collateralizability premium.

We examine how often audit firms are sued in a large sample of accounting lawsuits that allege financial reporting failures. We find an insignificant relation between the likelihood of auditor litigation and restatements, but the likelihood of auditor litigation is strongly related to the types of alleged accounting deficiencies. We also find that the auditor's type influences the probability of the auditor being sued and the size of the payouts from auditor and nonauditor defendants. In particular, the Big N firms are approximately 7 percent less likely than non–Big N firms to be named as co‐defendants, and the auditor's contribution to the plaintiff's payout is significantly larger when a Big N firm is sued. Overall, our findings suggest that auditors are rarely blamed when there are allegations of financial reporting failures, but the types of accounting deficiencies and the auditor's type significantly influence the probability of the audit firm being sued and the outcomes of the lawsuits.