We analyze an experiment conducted by a large U.S. bank that offered consumers achoice between two credit card contracts, one with an annual fee but a lowerinterest rate and one with no annual fee but a higher interest rate. We findthat on average consumers chose the credit contract that minimized their costs.A substantial fraction of consumers (about 40%) still chose the suboptimalcontract. Nonetheless, the probability of choosing the suboptimal contractdeclines with the dollar magnitude of the potential error, and consumers withlarger errors are more likely to subsequently switch to the optimalcontract.

We construct a simple measure of the aggregate illiquidity of hedge fund portfolios, based on the cross-sectional average first-order autocorrelation coefficient of hedge fund returns, and show that it has strong and robust in- and out-of-sample forecasting power for 72 portfolios of international equities, U.S. corporate bonds, and currencies over the 1994 to 2013 period. The forecasting ability of hedge fund illiquidity for asset returns is in most cases greater than, and provides independent information relative to, well-known predictive variables. We rationalize these findings using a simple equilibrium model, in which hedge funds provide liquidity in asset markets.

In the perfect markets corporate finance theory (Modigliani–Miller), public corporations (firms) have no economic function. Their existence therefore cannot be justified. An unsettling implication is that the extant corporate finance theory applies to an economy in which firms are irrelevant. This research precludes this implication by identifying an economic function for firms in perfect markets. Specifically, I show that firms exist to intermediate between “Main Street” (the real sector that supplies non-financial inputs) and “Wall Street” (the financial sector that supplies cash), and that this intermediation maximizes an investment's operating cash flows by minimizing the cost of the non-financial inputs. Key implications of this rationale for the firm include: i) an investment's NPV depends on the firm's cash holdings; working capital policy is an integral part of investment policy, ii) operating characteristics determine the firm's minimum size (equity capitalization) and “boundaries,” and iii) cash on corporate balance sheets is a “fundamental” for stock-pricing.

Li and You (this volume) study public firms’ common stock return reactions to two events: when analysts’ initiate coverage of the firm and when they terminate coverage. They test the returns for evidence of three sources of value added by analysts: (1) more monitoring of the firm, (2) reduced information asymmetry about the firm, and (3) greater demand for the firm’s common stock. They find consistent support for analysts adding value by increasing demand, but not monitoring or by reducing information asymmetry. Their findings also indicate that analysts’ initiations supply little new information. I review these findings, put them in perspective with related research, and note research directions.

Abstract I replicate and extend the seminal work of Camerer et al. (“Labor Supply of New York City Cabdrivers: One Day at a Time,” Quarterly Journal of Economics, 112 [1997], 407–441), who find that the wage elasticity of daily hours of work for New York City taxi drivers is negative and conclude that their labor supply behavior is consistent with reference dependence. In contrast, my analysis of the complete record of all trips taken in NYC taxi cabs from 2009 to 2013 shows that drivers tend to respond positively to unanticipated as well as anticipated increases in earnings opportunities. Additionally, using a discrete choice stopping model, the probability of a shift ending is strongly positively related to hours worked but at best weakly related to income earned. I find substantial heterogeneity across drivers in their elasticities, but the estimated elasticities are generally positive and rarely substantially negative. I find that new drivers with smaller elasticities are more likely to exit the industry, whereas drivers who remain quickly learn to be better optimizers (have positive labor supply elasticities that grow with experience). These results are consistent with the neoclassical optimizing model of labor supply and suggest that consideration of gain-loss utility and income reference dependence is not an important factor in the daily labor supply decisions of taxi drivers.

This paper studies two disclosure regimes when a firm with superior private information must rely on a strategic certifier to disclose credibly its prospects. In the ex ante (ex post) disclosure regime, the firm must decide on whether to hire the certifier before (after) observing the certifier׳s noisy assessment. Endogenously determined certification fees can actually cause the disclosure probability to decrease in disclosure precision. In the ex ante regime, favorable disclosures are more informative than unfavorable disclosures because of additional positive signaling effect. In the ex post (ex ante) regime, the certifier has incentives to increase (decrease) the disclosure precision.

Abstract We apply a new and innovative approach to communicating risks associated with financial products that should support investors in making better investment decisions. In our experiments, participants are able to gain “simulated experience” by random sampling of a previously described return distribution. We find that simulated experience considerably improves participants’ understanding of the underlying risk–return profile and prompts them to reconsider their investment decisions and to choose riskier financial products without regretting their higher risk-taking behavior afterwards. This method of experienced-based learning has high potential for being integrated into real-world applications and services.

The objective of this study is to examine managerial involvement in auditor selection decisions when audit committees are “directly responsible” for auditor relationships, including selection of the audit firm. The Sarbanes‐Oxley Act (SOX) of (2002) requires fully independent audit committees to be “directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm” (Section 301). This statutory requirement is a regulatory attempt to eliminate management influence over the external auditor and align auditor incentives with those of the board and shareholders.1 While regulators largely assume that audit committees take responsibility for auditor selection in the post‐SOX period (Doty 2011), there exists no archival analysis testing this assumption. Therefore, the effectiveness of this regulation (SOX Section 301) remains uncertain. In this paper, we examine (a) whether contrary to the intent of SOX, managers continue to influence auditor selection decisions in the post‐SOX period, and (b) whether this influence subsequently impairs auditor independence as presumed in the legislation.

We find, in a sample of 7581 merger offer announcements from 1990 to 2013, shareholders of 1283 (or 17%) target firms responded to the offer with negative market returns. These investors were disappointed at the offer, despite the price premium. To explain their disappointment, one must understand how target shareholders form expectations of premium to be received. We use a novel empirical design to find the relative weights of the rational vs. behavioral factors underlying the process of expectation formation. The estimated expected premiums are shown to have predictive power in the subsamples of both the positive and negative market responses. We also compare how the weights of the expectation factors change under different market conditions: hot vs. cold M&A regimes, bull vs. bear stock market, financial crisis vs. non-crisis periods, and dotcom bubble vs. no bubble.