ECONOMISTS generally take tastes as given and work out consequences of changes in prices, incomes, and other variables under assumption that tastes do not change. When pressed, either they engage in ad hoc theorizing or they explicitly delegate discussion of tastes to sociologist, psychologist, or anthropologist. Unfortunately, these disciplines have not developed much in way of systematic usable knowledge about tastes. Although economists have been reluctant to discuss systematically changes in structure of tastes, they have long relied on assumptions about basic and enduring properties of tastes. Self-interest is assumed to dominate all other motives,' with a prominent place also assigned to benevolence toward children2 (and occasionally others), and with self-interest partly dependent on distinction and other aspects of one's position in society.3 The dominance of self-interest and persistence of some benevolence have usually been explained by nature, or an equivalent evasion of problem. The development of modern biology since mid-nineteenth century and of population genetics in twentieth century made clear that is only beginning, not end of answer. The enduring traits of human (and animal) nature presumably were genetically selected under very different physical environments and social arrangements as life on earth evolved during millions of years. It is not difficult to understand why self-interest has high survival value under very different circumstances,4 but why should altruistic behavior, sometimes observed among animals as well as human beings, also survive? This kind of question has been asked by some geneticists and other biologists especially during last two decades. Their work has recently been christened sociI For example, Adam Smith said, We are not ready to suspect any person of being defective in selfishness [9, 1969, p. 446], and it is not from benevolence of butcher, brewer, or baker, that we expect our dinner, but from their regard to their own interest [10, 1937, p. 14]. 2According to Alfred Marshall, . . men labor and save chiefly for sake of their families and not for themselves [6, 1920, p. 228]. 3Nassau Senior said, the desire for distinction . . . may be pronounced to be most powerful of human passions [8, 1938, p. 12]. 4Ronald Coase argues convincingly that Adam Smith, especially in his Moral Sentiments, was groping toward an explanation of importance of selfinterest in terms of its contribution to viable social and economic arrangements (see Coase [5, 1976]).

Abstract Motivated by the rising importance of international sourcing by US firms in recent decades, we study the influence of international sourcing on capital structure. We find that international sourcing has a significant negative influence on financial leverage. The negative influence is stronger in industries that have high R&D intensities and are financially constrained. However, the negative relation is mitigated when suppliers are from countries with strong legal environments and when the supplier markets are more competitive. Overall, our findings suggest that relationship-specific investments, supplier market characteristics, and financial market conditions are key determinants of the sourcing–leverage relation.

Abstract Two influential papers in the tax‐avoidance literature (Desai and Dharmapala ; Desai, Dyck, and Zingales ) argue that aggressive forms of tax avoidance employ technologies that complement managerial rent extraction, and provide supporting evidence from firms in Russia. Several papers rely on this theory to motivate and interpret tests in a U.S. setting, but these tests are open to multiple interpretations. This paper investigates the extent to which shareholders of U.S. companies are affected by any such rent extraction. The evidence is inconsistent with the tax‐avoidance technologies employed by U.S. firms allowing managers to extract sufficient rents to negatively affect future performance. Additional tests on poorly governed U.S. firms find no evidence that tax‐avoidance activities relate positively to either overinvestment or higher executive compensation, and no evidence that either complexity or the Sarbanes‐Oxley Act moderates the relation between future performance and tax avoidance. The evidence suggests that caution is warranted in interpreting evidence according to this theory in a U.S. setting.

In addition to being a function of traditional fundamentals such as cash-flow persistence and the discount rate, the equilibrium association between a security price and a value-relevant statistic can simply be a function of what rational investors believe the association will be. We refer to this phenomenon as beliefs-driven price association (BPA). By explicitly considering the phenomenon of BPA, we show that the price response to information releases can vary over time even if the risk-free interest rate and investor preferences are static and the earnings/cash flow generating process is stable. This observation suggests, for example, that price-to-earnings associations and price volatility can vary over time even if a stable pattern of economic fundamentals suggests otherwise. The possibility of BPA suggests that measures of the cost of capital, information content, and growth prospects inferred from observed market prices will be confounded. While we do not predict when periods of BPA will arise, we provide empirically testable predictions about how prices should behave during periods of BPA. In particular, we predict that, during sufficiently long periods of high (positive or negative) BPA, price volatility, price levels, and expected returns will be higher than would be implied by a fundamental valuation framework. Finally, while BPA in the pricing of one security does not cause BPA in the pricing of other securities, the price levels of those other securities will be affected if the securities with BPA are sufficiently large relative to the market as a whole.

Using an integrated model to control for simultaneity, as well as new risk measurement techniques such as Adapted Exposure CoVaR and Marginal Expected Shortfall (MES), we show that the aggregate systemic risk exposure of financial institutions is positively related to sovereign debt yields in European countries in an episodic manner, varying positively with the intensity of the financial crisis facing a particular nation. We find evidence of a simultaneous relation between systemic risk exposure and sovereign debt yields. This suggests that models of sovereign debt yields should also include the systemic risk of a country's financial system in order to avoid potentially important mis-specification errors. We find evidence that systemic risk of a country's financial institutions and the risk of sovereign governments are inter-related and shocks to these domestic linkages are stronger and longer lasting than international risk spillovers. Thus, the channel in which domestic sovereign debt yields can be affected by another nation's sovereign debt is mostly an indirect one in that shocks to a foreign country's government finances are transmitted to that country's financial system which, in turn, can spill over to the domestic financial system and, ultimately, have a destabilizing effect on the domestic sovereign debt market.

This article shows that improving financial efficiency may reduce real efficiency. While the former depends on the total amount of information available, the latter depends on the relative amounts of hard and soft information. Disclosing more hard information (e.g., earnings) increases total information, raising financial efficiency and reducing the cost of capital. However, it induces the manager to prioritize hard information over soft by cutting intangible investment to boost earnings, lowering real efficiency. The optimal level of financial efficiency is non-monotonic in investment opportunities. Even if low financial efficiency is desirable to induce investment, the manager may be unable to commit to it. Optimal government policy may involve upper, not lower, bounds on financial efficiency.

We study the effects of regulatory interventions and capital support (bailouts) on banks’ liquidity creation. We rely on instrumental variables to deal with possible endogeneity concerns. Our key findings, which are based on a unique supervisory German dataset, are that regulatory interventions robustly trigger decreases in liquidity creation, while capital support does not affect liquidity creation. Additional results include the effects of these actions on different components of liquidity creation, lending, and risk taking. Our findings provide new and important insights into the debates about the design of regulatory interventions and bailouts.

We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks’ equity-prices. Our results also point to the importance of using levels of equity prices – rather than rates of return – in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.