Abstract This paper develops a real options model in which firms may use the timing of their initial public offerings (IPOs) to signal the quality of their investment prospects to outside investors. When adverse selection is more relevant (cold markets), firms with better investment prospects accelerate their IPO relative to their perfect information benchmark to reveal their type to outside investors. When adverse selection is less relevant (hot markets), all firms issue simultaneously, issuers are younger on average, and IPO timing is uninformative. An extension with multiple signals and the empirical evidence show that better ranked firms are younger, issue a lower fraction of shares, and underprice more during cold markets, and that issuers are younger on average during hot markets.

This paper proposes a model to conduct macro stress test of credit risk for the banking sector based on scenario analysis. We employ an original bank-level data set that splits bank credit portfolios in 21 granular categories, covering household and corporate loans. The results corroborate the presence of a strong procyclical behavior of credit quality, and show a robust negative relationship between the logistic transformation of non-performing loans (NPLs) and GDP growth, with a lag response of up to three quarters. The results also indicate that the procyclical behavior of loan quality varies across credit types. This is novel in the literature and suggests that banks with larger exposures to highly procyclical credit types and economic sectors would tend to undergo sharper deterioration in the quality of their credit portfolios during an economic downturn. Lack of sufficient portfolio granularity in macro stress testing fails to capture these effects and thus introduces a source of bias that tends to underestimate the tail losses stemming from the riskier banks in a system.

In the bank-borrower setting, a firm's existing lender may exploit its positional advantage to extract rents from the firm in subsequent financings. Analogously, a startup's existing venture capital investors (VCs) may dilute the founder through a follow-on financing from these same VCs (an “inside” round) at an artificially low valuation. Using a hand-collected dataset of Silicon Valley startup firms, we find little evidence that VCs use inside rounds to dilute founders. Instead, our findings suggest that inside rounds are generally used as “backstop financing” for startups that cannot attract new money, and these rounds are conducted at relatively high valuations (perhaps to reduce litigation risk).

Drawing on uncommonly rich and representative data from the Colombian manufacturing census, this paper documents new empirical relationships between input prices, output prices, and plant size and proposes a model of endogenous input and output quality choices by heterogeneous firms to explain the observed patterns. The key empirical facts are that, on average within narrowly defined sectors, (1) larger plants charge more for their outputs and (2) larger plants pay more for their material inputs. The latter fact generalizes the well-known positive correlation between plant size and wages. Similar correlations hold between prices and export status. We show that the empirical patterns are consistent with a parsimonious extension of the Melitz (2003, “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,” Econometrica, 71, 1695–1725) framework to include endogenous choice of input and output quality. Using a measure of the scope for quality differentiation from Sutton (1998, Technology and Market Structure: Theory and History. Cambridge: MIT Press), we show that differences across sectors in the relationships between prices and plant size are consistent with our model. Available evidence suggests that differences in observable measures of market power do not provide a complete explanation for the empirical patterns. We interpret the results as supportive of the hypothesis that quality differences of both inputs and outputs play an important role in generating the price–plant size correlations.

In Reinhart and Rogoff's economic history This Time is Different, the authors provide a panoramic view of crises from the Middle Ages to the modern era. Published just as the current global financial storm arrived, the book quickly showed how history could provide not just useful perspective but also, as we can now see, very prescient guidance in the aftermath. In the longer run, the book serves to inspire ongoing work in long-run macro-financial history. (JEL F30, G01, G20, N20)

This paper investigates the relationship between sovereign wealth fund (SWF) investment and the return-to-risk performance of target firms. Specifically, we find that target firm raw returns decline following SWF investment. Though risk also declines following SWF investment, we find that SWF investment is associated with a reduction in the compensation of risk over the 5years following acquisition. Firm volatility decomposition suggests that idiosyncratic risk is what mainly drives these impacts toward decline. Employing a multinomial logit framework wherein combinations of target returns and risk movements are categorized, we see that, in cases of foreign investment, SWFs’ target firm performance most closely resembles that of other government-owned firms. The observed results are inconsistent with predictions of higher volatility and improved returns due to monitoring firm activities from the institutional investor literature. This suggests that SWFs may not provide some of the benefits that are offered by other institutional investors.

We provide a model of intertemporal hedging consistent with selective hedging, a widespread practice corroborated by recent empirical studies. We argue that the optimal hedge is a value hedge involving total current value of future earnings. More importantly, the hedging decision is independent of risk preferences of the firm or agent. Our closed-form solutions imply several implications for the risk management policy in a firm. In order to lock in profits a hedge increase is recommended in favorable states of nature, while in bad states the firm should decrease the hedge and wait. Our main new empirical implication is that selective hedging should be more prevalent in industries where managers are exposed to convex cash flow structures and are more likely to “value hedge” their exposures.

We model a long-run relationship as an infinitely repeated game played by two equally patient agents. In each period, the agents play an extensive-form stage game of perfect information with either locally non-conflicting interests or strictly conflicting interests. There is incomplete information about the type of Player 1, while Player 2's type is commonly known. We show that a sufficiently patient Player 1 can leverage Player 2's uncertainty about his type to secure his highest pay-off, compatible with Player 2's individual rationality, in any perfect Bayesian equilibrium of the repeated game.