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.

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.

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.