We compare innovation strategies of public and private firms based on a large sample over the period 1997–2008. We find that public firms’ patents rely more on existing knowledge, are more exploitative, and are less likely in new technology classes, while private firms’ patents are broader in scope and more exploratory. We investigate whether these strategies are due to differences in firm information environments, CEO risk preferences, firm life cycles, corporate acquisition policies, or investment horizons between these two groups of firms. Our evidence suggests that the shorter investment horizon associated with public equity markets is a key explanatory factor.

We apply methods designed to measure mutual fund skill to a cross section of funds that is unlikely to exhibit managerial portfolio selection skill: index funds. Surprisingly, these tests imply index fund skill exists, is persistent, and is in similar proportion as in active funds. We use the distribution of passive fund performance to gauge the incremental ability of active managers. Outperformance by top active funds is lower when benchmarked to the index fund distribution and disappears when we account for residual risk. Stochastic dominance tests suggest no risk-averse investor should choose a random active fund over a random index fund.

We examine a specific channel through which director connectedness may improve monitoring: financial reporting quality. We find that the connectedness of independent, non-co-opted audit committee members has a positive effect on financial reporting quality and accounting conservatism. The effect is not significant for non-audit committee or co-opted audit committee members. Our results are robust to tests designed to mitigate self-selection. Consistent with connected directors being valuable, the market reacts more negatively to the deaths of highly connected directors than to the deaths of less connected directors. Better connected directors also have better career prospects, suggesting they have greater incentives to monitor.

We find that consumption risk is lower in states that implement countercyclical fiscal policies. Moreover, firms with an investor base that is concentrated in countercyclical states have lower stock returns, along with firms that relocate their headquarters to a countercyclical state. Therefore, countercyclical fiscal policies lower the consumption risk of investors and, consequently, their required equity return premium. This conclusion is confirmed by smaller declines in market participation during recessions in countercyclical states. Overall, the location of a firm’s investor base enables state-level fiscal policy to influence stock returns.

We develop an empirical model of bilateral exchange rates. It includes normal shocks with stochastic variance and jumps in an exchange rate and in its variance. The probability of a jump in an exchange rate corresponding to depreciation (appreciation) of the U.S. dollar is increasing in the domestic (foreign) interest rate. The probability of a jump in variance is increasing in the variance only. Jumps in exchange rates are associated with announcements; jumps in variance are not. On average, jumps account for 25% of currency risk. The dollar carry index retains these features. Options suggest that jump risk is priced.

The impact of liquidity-motivated institutional trading on firms’ real decisions is not confined to periods of financial crisis. Firms subject to mutual fund flow-driven selling pressure reduce share issuance and investment, whereas firms experiencing buying pressure do not increase investment, although they issue more equity. Firms under extreme selling pressure cut quarterly investment by 0.075 percentage points of total assets, which is 4.3% of the average quarterly investment in our sample. We also find evidence that the effect is not attributed to managerial learning or catering incentives. Rather, flow-driven trading affects investment mainly through its impact on the financing cost.

By collecting and disseminating price-sensitive information, financial analysts should reduce firm insiders’ informational advantage with a consequent impact on trading dynamics and market quality. We empirically examine the impact of complete analysts’ coverage termination on stocks’ liquidity, price discovery, and insider trading profitability. Termination leads to deteriorating liquidity and price efficiency, more informed trading, and higher profitability of insider trades. The magnitude of these effects depends on the strength of insiders’ ownership and on management’s decision whether to improve the firm’s information environment after coverage termination. Institutional investors alleviate, but do not eliminate, the negative effects of termination.

To “ensure depth and liquidity,” the European Central Bank intervened in sovereign debt markets through its Securities Markets Programme (SMP), providing a unique opportunity to estimate the effects of large-scale asset purchases on sovereign bond liquidity premia. From reduced-form estimates, we find robust, economically significant impact and lasting reductions in sovereign bonds’ liquidity premia in response to official purchases. We develop a search-based asset-pricing model to understand our empirical results. The theory implies that bond liquidity premia fall in response to both official purchases and rising sovereign default probabilities, as seen in the data.

We examine pitfalls in the use of return-based measures of systemic risk contributions (SRCs). For both linear and nonlinear return frameworks, assuming normal and heavy-tailed distributions, we identify nonexotic cases in which a change in a bank’s systematic risk, idiosyncratic risk, size, or contagiousness increases the risk of the system but lowers the measured SRC of the bank. Assessments based on estimated SRCs could thus produce false interpretations and incentives. We also identify potentially adverse side effects: A change in a bank’s risk structure can make the measured SRC of its competitors increase more strongly than its own.

We present a prediction model to forecast corporate defaults. In a theoretical model, under incomplete information in a market with publicly traded equity, we show that our approach must outperform ratings, Altman’s Z-score, and Merton’s distance to default. We reconcile the statistical and structural approaches under a common framework; that is, our approach nests Altman’s and Merton’s approaches as special cases. Empirically, the combined approach is indeed the most powerful predictor, and the numbers of observed defaults align well with the estimated probabilities. With a new transformation method, we obtain cycle-adjusted forecasts that still outperform ratings.

We examine the impact of managerial ability on the shareholder tax sensitivity of dividends. We find that managerial ability increases the sensitivity of dividends to the dividend tax penalty. In addition, the positive association between managerial ability and the shareholder tax sensitivity of dividends decreases in institutional ownership. Further, managerial ability increases the shareholder tax sensitivity of the substitution of dividends with share repurchases. Finally, evidence from tax reforms reveals that high ability managers are more responsive to a reduction in dividend tax penalty than to an increase. We conclude that managerial ability influences the formation of tax-efficient dividend policies.

We conduct a comprehensive out-of-sample assessment of the economic value adding of commodities in multiasset investment strategies that exploit the predictability of asset return moments. We find that predictability makes the inclusion of commodities profitable even when short selling and high leverage are not permitted. For instance, a mean-variance (non-mean-variance) investor with moderate risk aversion and leverage, rebalancing quarterly, would be willing to pay up to 108 (155) basis points per year after transaction cost for adding commodities to her stock, bond, and cash portfolio. Previous research had reached mixed or even opposite conclusions, especially in an out-of-sample context.

Treasury Inflation-Protected Securities (TIPS) are frequently thought of as risk-free real bonds. Using no-arbitrage term structure models, we show that TIPS yields exceeded risk-free real yields by as much as 100 basis points when TIPS were first issued and up to 300 basis points during the 2007–2008 financial crisis. This spread predominantly reflects the poorer liquidity of TIPS relative to nominal Treasury securities. Other factors, including the indexation lag and the embedded deflation protection in TIPS, play a much smaller role. Ignoring this spread also significantly distorts the informational content of TIPS break-even inflation, a widely used proxy for expected inflation.

I find that short-maturity Treasury-bill yields have unique information about risk premiums that is not spanned by long-maturity Treasury-bond yields. I estimate 2 components of risk premiums: long term and short term. The long-term component steepens the slope of yield curves and has a forecastability horizon of longer than 1 year. In contrast, the short-term component affects Treasury-bill yields but is almost invisible from Treasury bonds, has a forecastability horizon of less than 1 quarter, and is related to bond liquidity premiums.

We study changes in market quality associated with 9 modifications to the New York State securities transaction tax (STT) between 1932 and 1981 and 3 changes to the federal STT between 1932 and 1966. We find that when there is an increase in the level of an STT, individual stock volatility increases, bid–ask spreads widen, price impacts are greater, and volume decreases. We examine the propensity of traders to switch trading locations to avoid the tax and find mixed evidence that they will change locations. Overall, our findings support the notion that the imposition of or increases in an STT harm market quality.