[When a firm exercises discretion to disclose or withhold information (strategic disclosure), risk-averse investors command higher expected returns when expected cash flows decrease, producing a negative correlation between these expectations. Moreover, stock returns exhibit stronger reversal than they do when full disclosure is enforced. We propose a model that makes these predictions and provide consistent evidence using a panel of foreign firms that list American Depositary Receipts (ADRs). We find significant shifts in the time-series properties of stock returns for firms that undergo large changes in disclosure environments, such as those cross-listing on the NYSE/AMEX/NASDAQ and those from less-developed/emerging markets and code-law countries]

In portfolio risk minimization, the inverse covariance matrix prescribes the hedge trades in which a stock is hedged by all the other stocks in the portfolio. In practice with finite samples, however, multicollinearity makes the hedge trades too unstable and unreliable. By shrinking trade sizes and reducing the number of stocks in each hedge trade, we propose a “sparse” estimator of the inverse covariance matrix. Comparing favorably with other methods (equal weighting, shrunk covariance matrix, industry factor model, nonnegativity constraints), a portfolio formed on the proposed estimator achieves significant out-of-sample risk reduction and improves certainty equivalent returns after transaction costs.

We analytically study the economic consequences of the disclosure of managerial compensation contracts in a setting where two firms, by designing compensation contracts for their respective managers, compete for a new investment opportunity. Each manager is privately informed about her firm's profitability from this investment. We find that the disclosure leads to firms' emphasizing short-term stock performance in their managers' contracts. This, in turn, induces managers to signal favorable private information via myopic overinvestment, which deters rival firms' investments and gains their own firms a competitive edge. Nonetheless, such strategic use of compensation contracts is absent when the contracts are not disclosed; under this regime, equilibrium contracts only focus on long-term outcomes. Moreover, while disclosure-mandate-induced managerial myopia erodes firm profits, it may benefit consumer and social welfare. Our theory illuminates the economic consequences of the Compensation Discussion and Analysis (CD&A) disclosure implemented in 2006.

When a firm exercises discretion to disclose or withhold information (strategic disclosure), risk-averse investors command higher expected returns when expected cash flows decrease, producing a negative correlation between these expectations. Moreover, stock returns exhibit stronger reversal than they do when full disclosure is enforced. We propose a model that makes these predictions and provide consistent evidence using a panel of foreign firms that list American Depositary Receipts (ADRs). We find significant shifts in the time-series properties of stock returns for firms that undergo large changes in disclosure environments, such as those cross-listing on the NYSE/AMEX/NASDAQ and those from less-developed/emerging markets and code-law countries.

We examine how financial market development affects technological innovation. Using a large data set that includes 32 developed and emerging countries and a fixed effects identification strategy, we identify economic mechanisms through which the development of equity markets and credit markets affects technological innovation. We show that industries that are more dependent on external finance and that are more high-tech intensive exhibit a disproportionally higher innovation level in countries with better developed equity markets. However, the development of credit markets appears to discourage innovation in industries with these characteristics. Our paper provides new insights into the real effects of financial market development on the economy.

With superior information about their customers’ prospects, suppliers extend trade credit to capture future profitable business. We show that this information advantage generates significant return predictability. After controlling for major firm characteristics, firms that rely more on trade credit relative to debt financing have higher subsequent stock returns. The return predictability by trade credit is stronger among firms with lower borrowing capacity or profitability, and is more significant for firms with a higher degree of information asymmetry. Our findings suggest that trade credit extension reveals suppliers’ information that diffuses gradually across the investing public.

Firms with higher asset growth rates subsequently experience lower stock returns in international equity markets, consistent with the U.S. evidence. This negative effect of asset growth on returns is stronger in more developed capital markets and markets where stocks are more efficiently priced, but is unrelated to country characteristics representing limits to arbitrage, investor protection, and accounting quality. The evidence suggests that the cross-sectional relation between asset growth and stock return is more likely due to an optimal investment effect than due to overinvestment, market timing, or other forms of mispricing.

Using real-time data, we show that currency excess return predictability is in part due to mispricing. First, the risk-adjusted profitability of systematic trading strategies decreases after dissemination of the underlying academic research, suggesting that market participants learn about mispricing from publications. Moreover, the decline is greater for strategies with larger in-sample profits and lower arbitrage costs. Second, the effect of comprehensive risk adjustments on trading profits is limited, and signal ranks and alphas decay quickly. The finding that analysts’ forecasts are inconsistent with currency predictors implies that investors’ trading contributes to mispricing and suggests biased expectations as a possible explanation.

How consequential is social reputation for a CEO's career? We find that the CEOs of those firms with greater strengths (controversies) on corporate social responsibilities (CSR) are more (less) likely to serve on external boards, and they hold more (fewer) outside directorships. CEOs lose board seats after the media expose their companies in negative environmental and social news. More nuanced analyses show that workplace diversity and supply-chain human rights are most consequential among the social and environmental dimensions of CSR. Our study demonstrates that CEOs are judged on their companies' social reputation in the director labor market. Our results also suggest that social reputation plays an important role in promoting CSR.

We examine the relation between political uncertainty and cash holdings for firms in China. We document that, during the first year of a new city government official's appointment, a firm, on average, holds less cash, which is consistent with the grabbing hand hypothesis of politician. Our results are robust to alternative measures of cash holdings, instrumental variable estimation, sub-samples without firms in four major cities, a matched sample approach, and placebo tests. In addition, our additional analyses suggest that a firm holds significantly less cash if: (a) the newly appointed official is from a different city relative to that from the same city, (b) it faces high political extraction risk, and (c) it has strong twin agency conflicts. Lastly, our extended results suggest that the market value of cash holdings is significantly negative during periods of political uncertainty and firms hide their cash by moving it to related firms via related party transactions.