I exploit the leveraged exchange-traded funds’ (ETFs’) primary market to measure aggregate, uninformed, gambling-like demand, that is, speculation sentiment. The leveraged ETFs’ primary market is a novel setting that provides observable arbitrage activity attributed to correcting mispricing between ETFs’ shares and their underlying assets. The arbitrage activity proxies for the magnitude and direction of speculative demand shocks and I use them to form the Speculation Sentiment Index. The measure negatively relates to contemporaneous market returns (e.g., it is bullish in down markets) and negatively predicts returns. The results are consistent with speculation sentiment causing market-wide price distortions that later reverse.

We find that an increase in a firm’s incentives to use trade secrets to protect its intellectual property results in a more actively managed capital structure. Exploiting U.S. states’ adoption of the Uniform Trade Secrets Act as a positive “shock” in the protection afforded to trade secrets, we find that firms covered by the Act reduce debt levels while increasing investments in intangibles. Additional tests suggest that firms fund these financing and investment activities by issuing more equity. Consistent with an increase in overall intangibility magnifying contracting problems with creditors, we find that covered firms experience higher costs of debt.

Prior research documents that asset growth is negatively associated with future firm performance. In contrast, we show that growth financed by product market stakeholders (i.e., “operating growth”) is positively associated with future firm performance. Investors and security analysts underestimate the positive effects of operating growth on future performance, resulting in return predictability and overly pessimistic earnings forecasts for firms with high operating growth. Future stock returns largely concentrate around subsequent earnings announcements with declining magnitudes, consistent with the error-in-expectation explanation. Results from cross-sectional tests further support the hypothesis that operating growth signals high future performance but investors underreact to it.

We provide new evidence on how performance-based compensation plans affect CEO decision-making, especially risk-taking. Our main finding is that relative performance evaluation (RPE) plans provide incentives for CEOs to make decisions that generate more idiosyncratic performance outcomes; absolute performance evaluation (APE) plans do not. After switches from APE to RPE, the correlation between firm stock return and industry index return falls and firm idiosyncratic risk increases. Further, switches to RPE are followed by larger deviations in financial, investment, and operating policies from industry norms (i.e., more idiosyncratic strategies). All results are opposite for switches to APE.

This article demonstrates that low bank capital carries a negative externality because it amplifies local shock spillovers. We exploit a natural disaster that is transmitted to firms in nondisaster areas via their banks. Firms connected to a strongly disaster-exposed bank with lowest-quartile capitalization significantly reduce their total borrowing by 6.6% and tangible assets by 6.9% compared to similar firms connected to a well-capitalized bank. These findings translate to negative regional effects on GDP and unemployment. Additionally, following a disaster event, banks reduce their exposure to currently unaffected but generally disaster-prone areas.

We conjecture that marketplace lending provokes an increase in the quantity of entrepreneurship, particularly in more regionally disadvantaged areas, albeit at lower average quality. Using a fuzzy regression discontinuity design that exploits exogenous variation in borrowers’ access to marketplace loans along U.S. state borders, we estimate a 10% increase in marketplace lending causes a 0.44% increase in business establishments per capita. The effects are more pronounced for less experienced entrepreneurs, for small and less profitable firms, firms more dependent upon external finance, in industries with lower sunk costs of entry, and for low-income regions with inferior access to financial institutions.

We solve a flexible model that captures transactions costs and infrequencies of trading opportunities for illiquid assets to better understand the shadow costs of illiquidity for different origins of asset illiquidity and heterogeneous investor types. We show that illiquidity that results in suboptimal asset allocation carries low shadow costs, whereas these costs are high when illiquidity restricts consumption. As a result, the shadow costs are high for short-term investors, investors who face substantial liquidity shocks, and investors who desire to allocate a large fraction of their wealth to illiquid assets.

Standard portfolio choice models predict that investors consider the tax implications of trading. However, individuals are disposed toward realizing gains and holding losing investments, behaviors that worsen their performance. We show, in an experimental market, that increasing tax salience reduces the disposition effect between 22% and 47%, leading to higher portfolio balances without increasing total trading activity. Using field data, we find that investors’ disposition is sensitive to taxes around tax rate changes when taxes are likely salient. Our analysis demonstrates that increasing tax awareness can affect households’ portfolio choices, which suggests policy implications for improving financial decision-making.

Mandatory disclosure of CEO compensation peers signals potential outside opportunities for the cited CEOs by revealing which companies view them as viable executive candidates. CEOs cited often as compensation peers (especially by larger firms, which represent attractive employment opportunities) are more likely to leave for better positions or receive compensation increases. Equity-based awards following cites by larger firms have shorter vesting periods, suggesting these CEOs gain negotiating power relative to their boards. The disclosure requirement enhanced labor market transparency and led to higher compensation for highly cited CEOs without penalizing less cited CEOs, putting upward pressure on CEO compensation.

Fund flows are more correlated among funds with similar investment horizon, consistent with correlated demand for liquidity. We find that stocks held by institutions with more heterogeneous investment horizon are more liquid and have lower volatility of liquidity. Identification tests confirm that the improvement in stock liquidity holds when the increase in investor heterogeneity arises from an exogenous shock due to the 2003 tax reform. In addition, extreme flow-induced trading by institutional funds has a bigger price impact when stocks have a less heterogeneous investor base. Moreover, the premium associated with stock illiquidity is concentrated in stocks with low investor heterogeneity.

Blockholder disclosure thresholds shape incentives for hedge fund activism, which are jointly determined with real investment and managerial behavior. Uninformed investors value lower thresholds (greater transparency) when the cost of trading against an informed activist outweighs the benefits of the activist’s disciplining of management. Conversely, activists may desire disclosure thresholds if the threat of their participation discourages managerial malfeasance, which is their source of profits. Hedge fund activism can be excessive: If market opacity sufficiently harms uninformed investors, the costs of reduced real investment outweigh the social benefits from managerial disciplining, and society benefits from lower thresholds.

We present a rationale for bidder termination provisions that considers their effect on bidders’ and targets’ joint takeover gains. The provision’s inclusion can create value by enabling termination when the target becomes less valuable to the bidder than on its own, but creates a trade-off because termination may also occur when the target is more valuable to the bidder than on its own. This trade-off explains why the provision is included in only some deals, and explains variation in termination fees. Inclusion of the provision is associated with larger combined announcement returns, provided that the termination fee is priced appropriately.