By exploiting state-level variations in mortgage broker licensing regulations, we examine how licensing requirements affect mortgage loan performances and the mortgage origination market. Using data on private label securitized loans, we find that loans in states with a toughened broker licensing had a smaller increase in default rates. This effect is larger in the years leading up to the financial crisis, for borrowers with lower credit scores, cash-out-refinance loans, high-minority neighborhoods, and loans originated by nonbanks. The improved performance with toughened broker licensing is only partially reflected in loan pricing. Stronger broker licensing requirements have slightly positive effects on the mortgage approval rates, and are associated with overall less risky borrowers and loan characteristics in applications and in originations.

Past fund performance does a poor job of predicting future outcomes. The reason is noise. Using a random effects framework, we reduce the noise by pooling information from the cross-sectional alpha distribution to make density forecasts for each individual fund’s alpha. In simulations, we show that our method generates parameter estimates that outperform alternative methods, both at the population and at the individual fund level. An out-of-sample forecasting exercise also shows that our method generates improved alpha forecasts. Received November 23, 2016; editorial decision November 1, 2017 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web Site next to the link to the final published paper online.

The design and implementation of privatization in China is unique in that both are decentralized and administered by the local governments. Based on a proprietary survey data set containing 3, 000 firms in over 200 cities, this paper studies privatization choices and outcomes, as well as the mechanism behind the outcomes. We find that less political opposition to labor downsizing and greater fiscal capacity prompt cities to choose direct sales to insiders (MBOs). This method transfers control rights to private owners, retains limited government supports, imposes hardened budget constraints, allows for restructuring, and achieves performance improvement. Received September 8, 2015; editorial decision February 3, 2017 by Editor Andrew Karolyi.

ABSTRACT Our goal is to understand the extent to which cash-flow properties explain accruals. Using the Dechow, Kothari, and Watts (1998) model, we derive a negative relation between accruals and cash-flow changes, and show that the strength of the relation is linked to negative serial correlation in cash-flow changes. Dechow et al. (1998) also suggest that the strength of the relation between accruals and revenue changes relates to operating cycle length. Prior accrual models have not incorporated these theoretical relations. We show that incorporating cash-flow changes, serial correlation in cash-flow changes, and operating cycle length increases explanatory power of all accrual models considered (i.e., Jones 1991; Ball and Shivakumar 2006; McNichols 2002; Jeter and Shivakumar 1999). We find that incorporating these variables in accrual models also improves specification and power, aids detection of earnings management in AAER firms, and produces a nondiscretionary accrual estimate that better predicts future cash flows and earnings. These results suggest the importance of considering the economic role of accruals when predicting accruals.

Acquirers facing strong union power tend to acquire target firms with cash rather than equity or a mix of cash and equity. A one standard deviation increase in the union power faced by the acquirer increases the odds of choosing cash payment by a factor ranging from 1.26 to 1.57. The effect is stronger when: the acquiring firm is located in states without the right-to-work laws; the interests of managers are more aligned with shareholders in acquiring firms; and acquiring firms’ asset specificity is high. When union power is strong, acquirers making cash payment are associated with a significantly positive announcement return. In addition, they are less likely to experience labor strikes or declines in operating performance, and more likely to obtain wage concessions in collective bargaining in the post-acquisition period than acquirers using other methods of payment. These findings suggest that cash payment allows acquirers to reduce excess liquidity and strengthen their bargaining power with unions.

We document the existence of expertise rents by finding that financial experts on audit committees obtain higher abnormal returns from insider purchases than do non‐financial experts on audit committees. We further investigate whether information processing skills work alone or jointly with an information advantage to generate expertise rents. While financial experts on audit committees outperform financial experts on other committees, financial experts on compensation, executive, nominating, and governance committees do not outperform non‐financial experts on these committees. These findings suggest that expertise rents are domain‐specific and can be obtained only when directors have both access to private information and information processing skills. In additional testing, we find that expertise rents for financial experts on audit committees are primarily driven by non‐accounting financial experts, whose finance or supervisory experience could make them better than accounting financial experts in understanding market conditions and assessing firm risk.

We investigate the effect of managerial ability versus luck on bank loan contracting. Borrowers showing a persistently superior managerial ability over previous years (more likely due to ability) enjoy a lower loan spread, while borrowers showing a temporary superior managerial ability (more likely due to luck) do not enjoy any spread reduction. This finding suggests that banks can discern ability from luck when pricing a loan. Firms with high-ability managers are more likely to continue their prior lower loan spread. The spread-reduction effect of managerial ability is stronger for firms with weak governance structures or poor stakeholder relationships, corroborating the notion that better managerial ability alleviates borrowers’ agency and information risks. We also find that well governed banks are better able to price governance into their borrowers’ loans, which helps explain why good governance enhances bank value.

ABSTRACT We show that, motivated by sensation seeking, hedge fund managers who own powerful sports cars take on more investment risk but do not deliver higher returns, resulting in lower Sharpe ratios, information ratios, and alphas. Moreover, sensation‐seeking managers trade more frequently, actively, and unconventionally, and prefer lottery‐like stocks. We show further that some investors are themselves susceptible to sensation seeking and that sensation‐seeking investors fuel the demand for sensation‐seeking managers. While investors perceive sensation seekers to be less competent, they do not fully appreciate the superior investment skills of sensation‐avoiding fund managers.