The objective of this paper is to provide a deeper insight into the links between financial markets and the real economy. To that end, we study the short-term anticipation and response of U.S. stock, Treasury, and corporate bond markets to the first release of surprise U.S. macroeconomic information. Specifically, we focus on the impact of these announcements not only on the level, but also on the volatility and comovement of those assets’ returns. We do so by estimating several extensions of the parsimonious multivariate GARCH-DCC model of Engle (2002) for the excess holding-period returns on seven portfolios of these asset classes. We find that both the process of price formation in each of those financial markets and their interaction appear to be driven by fundamentals. Yet our analysis reveals a statistically and economically significant dichotomy between the reaction of the stock and bond markets to the arrival of unexpected fundamental information. We also show that the conditional mean, volatility, and comovement among stock, Treasury, and corporate bond returns react asymmetrically to the information content of these surprise announcements. Overall, the above results shed new light on the mechanisms by which new information is incorporated into prices within and across U.S. financial markets.

This paper examines the impact of competition on the optimal organization and financing structures in innovation-intensive industries. We show that as an optimal response to competition, firms may choose external organization structures established in collaboration with specialized start-ups where they provide start-up financing from their own resources. As the intensity of the competition to innovate increases, firms move from internal to external organization of projects to increase the speed of product innovation and to obtain a competitive advantage with respect to rival firms in their industry. We also show that as the level of competition increases, firms provide a higher level of financing for externally organized projects in the form of corporate venture capital (CVC). Our results help explain the emergence of organization and financing arrangements such as CVC and strategic alliances, where large established firms organize their projects in collaboration with external specialized firms and provide financing for externally organized projects from their own internal resources.

Firms reduce leverage following credit rating downgrades. In the year following a downgrade, downgraded firms issue approximately 1.5%–2.0% less net debt relative to net equity as a percentage of assets compared to other firms. This relationship persists within an empirical model of target leverage behavior. The effect of a downgrade is larger at downgrades to a speculative grade rating and if commercial paper access is affected. In particular, firms downgraded to speculative are about twice as likely to reduce debt as other firms. Rating upgrades do not affect subsequent capital structure activity, suggesting that firms target minimum rating levels.

We use a unique database on ownership stakes of equity mutual fund directors to analyze whether the directors’ incentive structure is related to fund performance. Ownership of both independent and nonindependent directors plays an economically and statistically significant role. Funds in which directors have low ownership, or “skin in the game,” significantly underperform. We posit two economic mechanisms to explain this relation. First, lack of ownership could indicate a director’s lack of alignment with fund shareholder interests. Second, directors may have superior private information on future performance. We find evidence in support of the first and against the second mechanism.

This paper uses investor-level data to provide direct evidence for an intuitive but surprisingly untested proposition that investors make larger investment mistakes when valuation uncertainty is higher and stocks are more difficult to value. Using multiple measures of valuation uncertainty and multiple behavioral bias proxies, I show that individual investors exhibit stronger behavioral biases when stocks are harder to value and when market-level uncertainty is higher. I also find that informed trading intensity is higher among stocks where individual investors exhibit stronger behavioral biases. Collectively, these results indicate that uncertainty at both stock and market levels amplifies individual investors’ behavioral biases and that relatively better informed investors attempt to exploit those biases.

We examine the impact of block ownership on the firm’s trading activity and secondary-market liquidity. Our empirical results show that block ownership takes potential trading activity off the table relative to a diffuse ownership structure and impairs the firm’s market liquidity. These adverse liquidity effects disappear, however, once we control for trading activity. Our findings suggest that block ownership is detrimental to the firm’s market liquidity because of its adverse impact on trading activity—a real friction effect. After controlling for this real friction effect, we find little evidence that block ownership has a negative impact on informational friction. Our results suggest that the relative lack of trading, and not the threat of informed trading, explains the inverse relation between block ownership and market liquidity.

Many financial markets, including electronic limit order markets, assign designated liquidity providers (LPs). We study the experience of the Stockholm Stock Exchange, where listed firms contract directly with LPs. Our analysis offers insights regarding situations where designated liquidity provision may be beneficial. In addition, we consider the form of liquidity provision contracts, including affirmative obligations required of the LP and compensation for LP services. We find that low current trading activity, wide spreads, and higher information asymmetry increase the attractiveness of contracted liquidity provision. The evidence indicates that LPs trade against market movements and in times of wide spreads. On balance, firms contracting with LPs experience a decreased cost of capital and significant improvements in market quality and price discovery.

In this paper I examine the likelihood of CEO stock option repricing and its alternatives: namely, option grant, stock grant, and “do nothing.” Multinomial logit results suggest that firms reprice options to increase sensitivity of pay to stock price and to temper down sensitivity of pay to volatility. Moreover, repricing firms are younger and more concentrated in industries where human capital is important. Finally, I find no evidence that internal governance or executive conflicts of interest are relevant in explaining repricing. My results indicate that repricing is motivated by incentive alignment and retention, and not by agency cost considerations.

We test the luxury consumption hypothesis of Ait-Sahalia, Parker, and Yogo (2004), using a unique international art price, import/export flow, and stock market data set. We find that the demand for art by Japanese collectors is positively correlated with art prices and Japanese stock prices. This correlation is magnified during the “bubble period” of the Japanese economy (the mid-1980s to the early 1990s) and gains even further strength for works of art typically favored by Japanese collectors. Our results suggest that Japanese investors (or Japanese asset markets) indeed affect international art prices—especially during the bubble period and its aftermath.