Despite significant interest in corporate culture, there is little empirical research on its role in influencing corporate misconduct. Using cultural background information on key company insiders, I construct a measure of corporate corruption culture, capturing a firm's general attitude toward opportunistic behavior. Firms with high corruption culture are more likely to engage in earnings management, accounting fraud, option backdating, and opportunistic insider trading. I further explore the inner workings of corruption culture and find evidence that it operates both as a selection mechanism and by having a direct influence on individual behavior.

We model the interplay between trade in the interbank market and creditor runs on financial institutions. We show that the feedback between them can amplify a small shock into "interbank market freezing" with "liquidity evaporating." Credit crunches of the interbank market drive up the interbank rate. For an individual institution, a higher interbank rate — meaning a higher funding cost — results in more severe coordination problems among creditors in debt rollover decisions. Creditors thus behave more conservatively and run more often. Facing an increased chance of creditor runs, institutions demand more and supply less liquidity, tightening the interbank market.

Abstract This article examines the benefits of corporate bond diversification for U.S. investors. Analysis of a newly compiled bond-level data set for 2000–2010 finds that diversification with corporate bonds can significantly reduce volatility and increase risk-adjusted returns for U.S. investors. Unlike diversification with equities, corporate bonds offer significant out-of-sample risk reduction, particularly during the recent financial crisis. Risk-reduction gains are large even when the benchmark includes international equities or when longer samples of equities and sovereign bonds are used to inform corporate bond returns. Finally, significant risk-reduction gains remain after accounting for bond characteristics, liquidity, and informational costs.

We propose a dynamic asset pricing model in which two assets with identical cash flows can trade at different prices not only because of differences in liquidity but counterparty risk. Counterparty risk reduces lenders or borrowers’ willingness to supply funds and collateral, incentives to shortsell and lend, and the likelihood for new bonds to be on special, thereby narrowing on-/off-the-run spreads and affecting asset prices in spot markets. Consistent with this prediction, we find that on-/off-the-run spreads are low when counterparty risk is high and this relationship is much stronger during the financial crisis. Received January 28, 2015; accepted October 4, 2016 by Editor Maureen O' Hara.

We model the interplay between trade in the interbank market and creditor runs on financial institutions. We show that the feedback between them can amplify a small shock into “interbank market freezing” with “liquidity evaporating.” Credit crunches of the interbank market drive up the interbank rate. For an individual institution, a higher interbank rate — meaning a higher funding cost — results in more severe coordination problems among creditors in debt rollover decisions. Creditors thus behave more conservatively and run more often. Facing an increased chance of creditor runs, institutions demand more and supply less liquidity, tightening the interbank market. Received September 29, 2014; accepted March 7, 2016 by Editor Itay Goldstein.

Prior research shows that companies repurchase stock during quarters with low returns, presumably because the stock is undervalued. We focus on repurchase increases and investigate another motive: Are repurchases increased to provide price support for a stock that, despite recent low returns, remains overvalued? Using an increase in short selling to indicate overvaluation, we regress quarterly changes in share repurchases on quarterly changes in short interest. Consistent with price support, the association is positive and statistically significant each year from 2003 to 2014. We find that the price support quarter is followed by a sharp multi-quarter decline in ROA (return on assets), but the corresponding decline in EPS (earnings per share) is modest due to the reduction in outstanding shares. Abnormal returns after the price support quarter are positive, indicating that price support is effective. We also examine trading by insiders. While insiders generally sell when shorts sell, they hold onto shares during the price support quarter. This indicates that insiders are confident that they can maintain the current stock price.

We examine asset allocation decisions under smooth ambiguity aversion when an investor has a prior degree of belief in an asset pricing model (e.g., the domestic CAPM). Different from a Bayesian approach, the investor separately relies on the conditional distribution of returns and on the posterior over parameters to make decisions, rather than on the predictive distribution of returns that integrates priors and likelihood information. We find that in the perspective of US investors, ambiguity aversion generates strong home bias in equity holdings, regardless of beliefs in the CAPM or risk aversion. Results become stronger under regime-switching investment opportunities.

Abstract We extend the constant-elasticity regression that is the default choice when equities’ exposure to currencies is estimated. In a proper real-option-style model for the exporters’ equity exposure to the foreign exchange rate, we argue, the convexity of the relationship implies that the elasticity should depend on the exchange rate level. For instance, it should shrink to zero when the option to export becomes worthless, and that should happen at a critical exchange rate that is still strictly positive. We propose a class of tractable multi-regime regression models featuring, in line with the real-options logic, smooth transitions and within-regime dynamics in the foreign exchange exposure. We then analyze the exchange rate exposure of Chinese exporting firms and find that the model in which the moneyness of the export option has a positive impact on the exchange rate exposure detects a significantly positive and convex exposure for 40% and 65% of the firms depending on whether the market return is included in the regression or not.

This study investigates how managerial professional connections, through executives' membership of an industry association, play a role in helping firms obtain trade credit, while political connections do not. We document that firms whose managers have professional connections receive more trade credit, especially in firms that are not controlled by the state (non-SOEs), which have limited access to formal financial resources. The business environment, for example, low social trust and high product market competition, also strengthen the positive relationship between managers' professional connections and firms' access to trade credit. We further provide evidence that directors' professional connections also bring firms more trade credit and that firms with professional connections make more use of financing component of trade credit and abnormal trade credit. Our results are robust to a series of robustness and endogeneity tests. Overall, we argue that managerial professional connections, other than political connections, help firms, especially those with limited access to formal financing, to obtain informal financing resources.

This paper identifies the prevailing financial factors that influence credit spread variability and shows how they affected the U.S. business cycle during the 1990–91 and 2001 recessions of the Great Moderation period (1984–2006) and the Great Recession of 2007–09. To do this, we develop and estimate a dynamic general equilibrium model in which financial intermediation and equity assets play a central role. Over the three recession periods, we find that bank market power (sticky rate adjustments and loan rate markups) played a significant role in the credit spread variability that disrupted the U.S. business cycle. Equity prices exacerbate movements in credit spreads through the financial accelerator channel, but cannot be regarded as one of the main driving forces of credit spread variability. Across the three periods, we observe a remarkable decline in the influence of technology and monetary policy shocks. The influence of loan-to-value ratio shocks declined after the 1990–91 recession, while the bank capital requirement shock exacerbated and prolonged credit spread variability over the 2007–09 recession.