This paper provides a theoretical explanation for how risk preferences of a firm’s manager impact a firm’s optimal financing policy and shareholder value. The developed model implies that firms in growing industries are more valuable if they are run by more risk-seeking managers. Similarly, firms operating in declining industries should be run by less risk-seeking managers. Given that a firm’s optimal assets do not depend on the growth opportunities, and that debt is the difference between assets and equity, the model implies that there is a negative (positive) correlation between the riskiness of CEOs’ compensation packages and firms’ financial leverage ratios for firms in growing (declining) industries. This prediction is in stark contrast to economic intuition and prior literature in that less risk aversion normally should increase risk-taking. The empirical analysis generally supports all the model’s implications except those related to firms operating in declining industries.

We find that the magnitude of unique credit default swap (CDS) market information (constructed to be orthogonal to contemporaneous and lagged stock returns) declined after recent reforms that increased the level of post-trade regulatory and market transparency for CDSs. Around the same reforms, the ability of this CDS-unique information to predict future stock returns decreased. These results suggest the CDS market has become less of a “hidden” trading venue for informed investors since central clearing and trade reporting started.

We construct size and value factors in China. The size factor excludes the smallest 30% of firms, which are companies valued significantly as potential shells in reverse mergers that circumvent tight IPO constraints. The value factor is based on the earnings-price ratio, which subsumes the book-to-market ratio in capturing all Chinese value effects. Our three-factor model strongly dominates a model formed by just replicating the Fama and French (1993) procedure in China. Unlike that model, which leaves a 17% annual alpha on the earnings-price factor, our model explains most reported Chinese anomalies, including profitability and volatility anomalies.

We offer a propensity score perspective to interpret and analyze the marginal treatment effect (MTE). Specifically, we redefine MTE as the expected treatment effect conditional on the propensity score and a latent variable representing unobserved resistance to treatment. As with the original MTE, the redefined MTE can be used as a building block for constructing standard causal estimands. The weights associated with the new MTE, however, are simpler, more intuitive, and easier to compute. Moreover, the redefined MTE immediately reveals treatment effect heterogeneity among individuals at the margin of treatment, enabling us to evaluate a wide range of policy effects.

This paper investigates how variations in stock-level leverage lead to dynamic intraday trading behavior and illiquidity transmission across different stocks by utilizing a unique, precise, stock-level margin trading dataset. We document that leveraged investors’ need to meet margin call requirements and liquidity demands due to prior market drops results in subsequent selloffs in otherwise stable stocks, particularly in trading sessions in which there is little new information. This effect exists both within and across different industries and is stronger for stocks with less information asymmetry, better liquidity, higher past stock performance, and even during trading suspension. We also find strong evidence on the volatility spillover induced by leverage. Taken together, such findings suggest that our results are driven by illiquidity contagion instead of information spillover. Our study contributes to the research on asset fire sales, margin trading, and funding liquidity during the intraday deleveraging process in financial market turmoil.

This study investigates whether gender pay inequality in the top management team, measured by gender pay slice (GPS), is a factor in Say on Pay (SoP) voting as required by the 2010 Dodd-Frank Act. Since CEOs are known to play a distinct role in SoP voting, we treat CEOs separately and define GPS as the fraction of total non-CEO executive compensation captured by females. Controlling for numerous factors including CEO pay and CEO gender, ISS recommendations, pay composition, firm performance, and other firm characteristics, we find robust evidence of a negative relation between non-CEO GPS and SoP votes, but this gender-based difference in SoP voting does not extend to the CEO. Taken together, our findings imply that gender equality in terms of SoP voting is still an issue for female executives at the sub-top level.

ABSTRACT We examine whether a firm's strategic priorities influence its selection of a new CEO and what conditions enable such an appointment to add value to the firm. More specifically, this study investigates the value‐adding effect when prospector firms (i.e., those pursuing a prospector‐type strategy) select a CEO with high social capital. We argue that uncertainty, driven by a firm's strategy, will determine the decision to select a CEO with high social capital; such CEOs can use their networks to mitigate the uncertainty and thus can be valuable to the firm. However, prior research indicates that CEOs with high social capital can engage in behavior detrimental to firm value. To mitigate the potential for this to occur, we assess whether corporate governance can play a role in prospector firms who appoint CEOs with high social capital. Drawing on archival data of CEO successions over a 14‐year period, we find that prospector firms have greater incentives to appoint CEOs with high social capital. We also find that prospector firms who appoint a CEO with high social capital improve their performance. Furthermore, the value‐adding effect of this selection choice is stronger in prospector firms with good corporate governance.

We perform transaction-level analyses of entrusted loans, one of the largest components of shadow banking in China. Entrusted loans involve firms with privileged access to cheap capital channeling funds to less privileged firms, and the increase when credit is tight. Nonaffiliated loans have much higher interest rates than both affiliated loans and official bank loans, and they largely flow into real estate. The pricing of entrusted loans, especially of nonaffiliated loans, incorporates fundamental and informational risks. Stock market reactions suggest that both affiliated and nonaffiliated loans are fairly compensated investments.

ABSTRACT This paper investigates whether maintaining a reputation for consistently beating analysts' earnings expectations can motivate executives to move from “within GAAP” earnings management to “outside of GAAP” earnings manipulation. We analyze firms subject to SEC enforcement actions and find that these firms consistently beat analysts' quarterly earnings forecasts in the three years prior to the manipulation period and continue to do so by smaller “beats” during the manipulation period. We find that manipulating firms beat expectations around 86 percent of the time in the 12 quarters prior to the manipulation period (versus 75 percent for control firms) and that manipulation often ends with a miss in expectations. We document that executives of manipulating firms face strong stock market and CEO pressure to perform. Prior to the manipulation period, these firms have high analyst optimism, growing institutional interest, and high market valuations, along with powerful CEOs. Further, we find that maintaining a reputation for beating expectations is more important than CEO overconfidence and is incremental to CEO equity incentives for explaining manipulation. Our results suggest that pressure to maintain a reputation for beating analysts' expectations can encourage aggressive accounting and, ultimately, earnings manipulation.