Understanding the nature of capitalism has been a central theme of economics. The collapse of the Eastern Bloc and the global financial crisis spurred the reemergence of the political economy as a new frontier and the revival of interest in the nature of capitalism. János Kornai's book Dynamism, Rivalry, and the Surplus Economy: Two Essays on the Nature of Capitalism fills an important intellectual gap in understanding the dynamic nature of capitalism by comparing it with its mirror image, socialism. To further develop the themes contained in the book, serious challenges are posed theoretically and empirically, as well as in subjects, such as hybrid capitalism.

We examine the valuation effects of cross-border merger and acquisition (M&A) waves. Like domestic M&As, cross-border M&As cluster by industry and time. Cross-border M&A waves create value overall: acquirer announcement returns, combined acquirer and target announcement returns, and post-merger operating performance within waves are significantly higher than those outside of waves. Unlike domestic M&A waves, deals undertaken later in waves outperform those earlier in waves. The late entrants' outperformance is stronger when target countries differ from acquirer countries in terms of culture, financial development, and legal system. Overall, the results suggest that cross-border acquisitions promote efficient redeployment of corporate assets.

The literature on institutions has been challenged on grounds of reverse causality, measurement error in institutional indicators, and heterogeneity. This paper uses firm-level data across countries to confront these challenges. We focus on the effect on firm-level external finance, and “unbundle” institutions in the sense of Acemoglu and Johnson (2005), while addressing the largely-ignored issue of measurement error in institutional indicators. We find that contracting institutions that facilitate transactions between private parties exert little effect on firms' access to external finance. In contrast, property rights institutions that constrain political and economic elites exhibit a strong positive association with access to external finance. Interestingly, the association between property rights institutions and external finance tends to be stronger for working capital than for investment. Our results suggest that an important channel for institutions and especially property right institutions to affect development is through access to external finance.

We study how product market competition affects firms' ownership structures using a large sample of closely held firms in eighteen European countries. We show that firms operating in more competitive environments have lower inside ownership and that the stakes of their outside shareholders are more dispersed. These results are explained by competition increasing the need to raise external equity and reducing private control benefits. Our findings suggest that, by changing corporate ownership structure, competition mitigates incentive misalignment among shareholders, leading to better firm performance and gains in economic efficiency.

We characterize the properties of optimal accounting rules in a signaling game. An impatient firm sells shares to competitive investors. The firm can signal its private information about the fundamental by retaining a fraction of the shares. In addition, the firm can commit to disclosing information according to a set of accounting rules chosen ex ante. Information disclosure reduces signaling cost so that perfect disclosure is optimal. When perfect disclosure is impossible, the optimal accounting rule features a lower bound and a summary statistic of the fundamental. The interpretation of the lower bound is consistent with accounting conservatism, and the statistic summarizes the information most relevant to the firm׳s valuation. The justification for accounting conservatism relies on the existence of information asymmetry and the infeasibility of perfect accounting disclosure. This is consistent with the conjecture of LaFond and Watts (2008) that information asymmetry calls for accounting conservatism.

We explore the properties of equity mutual funds that experience a loss of assets after poor performance. We document that both inflows and outflows are less sensitive to performance, because performance-sensitive investors leave or decide not to invest after bad performance. Consistent with the idea that attrition measures the sorting of performance-sensitive investors, we find that attrition has less of an impact on the fund’s flow–performance sensitivity for institutional funds where there is less dispersion in investor performance sensitivity. Also, attrition has no effect on the flow–performance sensitivity when attrition arises after good performance or investors invest for nonperformance reasons.

We document a housing wealth effect on the stock liquidity of local firms. We first demonstrate that the heterogeneity of homeownership rates across geographical areas can explain variations in the impact that changes in house prices have on local stock liquidity. We then show, consistent with expectations that an increase in housing wealth leads to a reduction in household risk aversion, that the liquidity of lottery stocks and stocks dominated by individual investors rises. We also show that it promotes local liquidity commonality and reduces the proportion of firm-specific information revealed in stock returns.

In this paper, we examine the relation between innovation and a firm’s financial dependence using a sample of privately held and publicly traded US firms. We find that public firms in external finance dependent industries spend more on research and development and generate a better patent portfolio than their private counterparts. However, public firms in internal finance dependent industries do not have a better innovation profile than private firms. The results are robust to various empirical strategies that address selection bias. The findings indicate that the influence of public listing on innovation depends on the need for external capital.

We study how product market competition affects firms’ ownership structures using a large sample of closely held firms in eighteen European countries. We show that firms operating in more competitive environments have lower inside ownership and that the stakes of their outside shareholders are more dispersed. These results are explained by competition increasing the need to raise external equity and reducing private control benefits. Our findings suggest that, by changing corporate ownership structure, competition mitigates incentive misalignment among shareholders, leading to better firm performance and gains in economic efficiency.

In this paper, we study the impacts of the Net Stable Funding Ratio (NSFR) requirement on banks’ choices of debt maturity and asset structures, with consequences for banks’ profitability and social welfare. We develop a model in which the manager of a bank determines both debt maturity structure (short-term vs. long-term debt) and asset composition (cash vs. risky assets). To address the incongruence of goals between the bank manager and the bank stakeholders, in our model we assume that the manager receives only a proportion of the bank’s profit in her pay schedule. We demonstrate that the optimal choices of the manager regarding debt maturity and asset structure lead to socially inefficient (second-best) outcomes because the manager internalizes only part of the social benefit. We then study the implications of the NSFR requirement on the manager’s choices and demonstrate that the NSFR requirement can enhance social welfare and reach an efficient (first-best) outcome, if a sufficiently low weight of short-term debt as available stable funding is required by regulation. Further, we find that under the same conditions the NSFR requirement reduces banks’ use of short-term financing and thus increases the probability of banks’ survival and profits from the ex ante point of view, while it decreases banks’ profits from the ex post point of view, since it reduces the threshold for banks’ survival. Our main results have some interesting empirical implications: under certain conditions, the NSFR requirement may reduce both bank failures and banks’ observed profits.