We develop an asset pricing model with stochastic transaction costs and investors with heterogeneous horizons. Depending on their horizon, investors hold different sets of assets in equilibrium. This generates segmentation and spillover effects for expected returns, where the liquidity (risk) premium of illiquid assets is determined by investor horizons and the correlation between liquid and illiquid asset returns. We estimate our model for the cross-section of U.S. stock returns and find that it generates a good fit, mainly due to a combination of a substantial expected liquidity premium and segmentation effects, while the liquidity risk premium is small.

Using establishment-level data, we examine the impact of the Indian government’s employment guarantee program on labor and firm behavior. We exploit the staggered implementation of the program for identification and find that the program led to a 10% reduction in the permanent workforce in firms. Firms responded to the adverse labor-supply shock by resorting to increased mechanization. This significantly increased the firms’ cost of production, leading to a decline in net profits and productivity. These effects manifested primarily in firms paying low wages, firms having low labor productivity and greater sales volatility, and firms located in states with pro-employer labor regulations.

This paper evaluates how the relation between firms’ cash holdings and their acquisition decisions changes over macroeconomic cycles using a sample of 47,615 acquisitions from 36 countries between 1997 and 2014. Higher cash holdings and stronger macroeconomic conditions each increase the likelihood that a firm will make an acquisition. However, larger cash holdings decrease the sensitivity of acquisitions to macroeconomic factors, suggesting that cash holdings lower financing constraints during times when the cost of external finance is high. Announcement day abnormal returns for acquirers follow a consistent pattern: They decrease with acquirer cash holdings and with better macroeconomic conditions.

We investigate the causal effect of intangible capital on leverage. To address endogeneity, we exploit patent invalidations by a U.S. court in which judges are randomly assigned to cases. Differences in judge leniency provide exogenous variation in the probability that firms’ patents are invalidated. Using this probability as an instrument for exogenous losses in intangible capital, we find a patent invalidation leads to a 14.1% reduction in leverage, suggesting that intangible capital causally supports leverage. This local average treatment effect is stronger in firms that use patents as loan collateral and in less creditworthy as well as smaller firms.

We investigate the dynamics of observed and target leverage ratios and deviations from the targets. The cross-sectional persistence in leverage ratios is driven by persistent targets, whereas time-series variation is driven by transitory deviations from targets. Consistent with dynamic trade-off theories, persistence is higher when the costs of deviating from targets are lower and when the adjustment costs are higher. Deviations are less persistent for firms that are over-levered and firms that are smaller, younger, or more focused or that have lower credit ratings. In recessions, excess leverage is less persistent for larger firms and is more persistent for smaller firms.

This article studies the impact of unconventional monetary policy on bank lending and security holdings. I exploit granular security register data and use a difference- in-differences regression setup to provide evidence for a yield-induced portfolio rebalancing: Banks experiencing large average yield declines in their securities portfolio, induced by unconventional monetary policy, increase their real-sector lending more strongly relative to other banks. The effect is stronger for banks facing many reinvestment decisions. Moreover, I find that banks with large yield declines reduce their government bond holdings and sell securities bought under the asset-purchase program of the European Central Bank (ECB).

I examine whether firms’ use of alternative work arrangements, particularly temporary agency workers, affects their cost of equity. Exploiting a major labor-market deregulation in Japan that induced manufacturing firms to increase their employment of temporary agency workers, I show that the cost of equity decreased in manufacturing firms, relative to nonmanufacturing firms, after the deregulation. Further analysis using variations within manufacturing firms provides corroborating evidence. The rigidity in labor expenses and the cost of debt also decreased in manufacturing firms. Overall, alternative work arrangements increase the flexibility in labor costs, leading to lower operating leverage and cost of capital.

U.S. multinational enterprises repatriated over $300 billion under the 2004 tax holiday. The repatriated funds can improve debt financing environment of nonrepatriating firms, especially those that are financially constrained. We document that such an externality of the tax holiday increases debt financing and consequently investments for financially constrained nonrepatriating firms relative to less constrained nonrepatriating firms. Using private loan market data, we further confirm a link from repatriated funds to increased debt financing for financially constrained nonrepatriating firms. Overall, the 2004 tax holiday appears to have benefited the U.S. economy through its positive externality on the debt market.

This article investigates how the asset-return variance risk premium changes leverage. I find that the premium reduces leverage by increasing risk-neutral bankruptcy probability and costs in a model where asset returns have stochastic variance with the risk premium. Empirically, the model calibrations verify a significant reduction in optimal leverage, closer to observed leverage than the model without the premium. In model-free regressions, I document that leverage correlates negatively with the variance premium. The highest negative correlation is among investment-grade firms with low asset beta and historical variance but high variance premiums because their assets have high exposure to the market’s variance premium.

This article investigates the role external advice plays in the board’s determination of chief executive officer (CEO) compensation. We show that CEO incentive pay increases with the degree of compensation consultant independence using a quasi-natural experiment provided by the creation of an independent consultant after separation from an affiliated consultant. Specifically, switching to an independent consultant significantly increases the pay–performance sensitivity and relative performance evaluation of CEO contracts. Despite the benefits of independent advice, independent consultants may not be hired due to the influence of powerful CEOs or because boards already possess adequate expertise.