We theorize and confirm a new channel by means of which liquidity costs are embedded in CDS spreads. We show that credit default swap (CDS) spreads are directly related to equity market liquidity in the Merton [Merton, R.C., 1974. On the pricing of corporate debt: The risk structure of interest rates. J. Finance 29, 449–470] model via hedging. We confirm this relationship empirically using a sample of 1452 quarterly CDS spreads over 2001–2005. In the model, this relationship is monotone increasing when credit quality worsens. These results are robust to alternative measures of equity liquidity and other possible determinants of CDS spreads.

We review key characteristics of the hedge fund industry, and identify conditions under which this sector can pose a threat to financial stability. Direct regulation of hedge funds that increases transparency does not appear feasible, may create a moral-hazard problem, and may reduce market liquidity. Indirect regulation by prime brokers and market discipline by creditors, counterparties, and investors have been effective in limiting the risks from the hedge fund sector. To reduce systemic risks, more regulation of prime brokers is warranted to avoid competitive dynamics from undermining counterparty risk management practices.

This paper presents simple new multisignal generalizations of the two classic methods used to justify the first-order approach to moral hazard principal–agent problems, and compares these two approaches with each other. The paper first discusses limitations of previous generalizations. Then a state-space formulation is used to obtain a new multisignal generalization of the Jewitt (1988) conditions. Next, using the Mirrlees formulation, new multisignal generalizations of the convexity of the distribution function condition (CDFC) approach of Rogerson (1985) and Sinclair-Desgagné (1994) are obtained. Vector calculus methods are used to derive easy-to-check local conditions for our generalization of the CDFC. Finally, we argue that the Jewitt conditions may generalize more flexibly than the CDFC to the multisignal case. This is because, with many signals, the principal can become very well informed about the agent's action and, even in the one-signal case, the CDFC must fail when the signal becomes very accurate.

Using a large sample of private credit agreements between U.S. publicly traded firms and financial institutions, we show that over 90% of long-term debt contracts are renegotiated prior to their stated maturity. Renegotiations result in large changes to the amount, maturity, and pricing of the contract, occur relatively early in the life of the contract, and are rarely a consequence of distress or default. The accrual of new information concerning the credit quality, investment opportunities, and collateral of the borrower, as well as macroeconomic fluctuations in credit and equity market conditions, are the primary determinants of renegotiation and its outcomes. The terms of the initial contract (e.g., contingencies) also play an important role in renegotiations; by altering the structure of the contract in a state contingent manner, renegotiation is partially controlled by the contractual assignment of bargaining power.

[We show that investor recognition and bonding associated with a U.S. cross-listing are distinct effects using a sample of Canadian firms. In contrast to the post-listing decline documented in the literature, we find that cross-listed firms with a single class of shares enjoy a permanent increase in valuation if they attract and maintain investor recognition over time. Valuations of firms that fail to widen their U.S. shareholder base return to prelisting levels within two years. Cross-listed firms with dual-class shares exhibit a permanent increase in valuation regardless of the level of U.S. investor holdings, consistent with firmlevel bonding]

[We examine whether a large shareholder can alleviate conflicts of interest between managers and shareholders through the credible threat of exit on the basis of private information. In our model, the threat of exit often reduces agency costs, but additional private information need not enhance the effectiveness of the mechanism. Moreover, the threat of exit can produce quite different effects depending on whether the agency problem involves desirable or undesirable actions from shareholders' perspective. Our results are consistent with empirical findings on the interaction between managers and minority large shareholders and have further empirical implications.]

[Fama and French (2001a) show that the propensity to pay dividends declines significantly between 1978 and 1999. We examine this "disappearing dividends" puzzle through the lens of risk and report two main findings: (i) Risk is a significant determinant of the propensity to pay dividends, and it explains roughly 40% of disappearing dividends; (ii) We find little support for the view that disappearing dividends reflects firms' catering to transient fads for dividends. Absent risk controls, proxies for fads matter, but these proxies are insignificant once we control for risk. Our results are robust to an extensive battery of robustness tests that vary samples, time periods, proxies for fads, the types of empirical tests, and the nature of payout decisions made by firms.]

[Theory suggests that greater hierarchical distance between a subordinate and his boss makes it more difficult to share abstract and subjective information in decision making. A novel dataset put together from credit dossiers of large corporate loan applicants enables us to observe the information collected by loan officers, and how it is used by the ultimate loan approving officer. We find that greater hierarchical/geographical distance between the information collecting agent and the loan approving officer leads to less reliance on subjective information and more on objective information. By exploiting nonlinearities in the "assignment rules" that determine an applicant's hierarchical distance, and using information collecting agent fixed effects, we show that our result cannot be driven by endogenous assignment of applicants. We also find that higher frequency of interactions between the information collecting agent and loan approving officer, both over time and through geographical proximity, helps mitigate the effects of hierarchical distance on information use. Our results show that hierarchical distance influences information use, and highlights the importance of "human touch" in communication.]

Share issuance predicts cross-sectional returns in a non-U.S. sample of stocks from 41 different countries. Issuance predictability has greater statistical significance than either size or momentum, and is similar to book-to-market. As in the U.S., the international issuance effect is robust across both small and large firms. Unlike the U.S., the effect is driven more by low returns after share creation rather than positive returns following share repurchases. Issuance return predictability is stronger in countries with greater issuance activity, greater stock market development, and stronger investor protection. The results suggest that the share issuance effect is related to the ease with which firms can issue and repurchase their shares.