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We examine whether rating agencies act defensively toward issuers with a higher likelihood of default. We find that agencies' qualitative soft rating adjustments are more accurate as issuers' default risk grows, as evidenced by the adjustments leading to lower type I and type II error rates and better prediction of default and default recovery losses. We also find that soft adjustments' relevance increases with issuers' default risk, as evidenced by the adjustments being more predictive of initial offering yields and leading to a greater market reaction to rating changes. Further, we find that the rating agencies assign better educated and more experienced analysts to higher-risk issuers, providing evidence of one mechanism used by the rating agencies to generate more accurate and relevant soft adjustments. Overall, our study suggests that as the likelihood of issuer default grows, the threat of reputational harm from discovered rating failures increasingly mitigates the rating agencies' strategic behavior incentivized by the issuer-pay model. This paper was accepted by Brian Bushee, accounting. Funding: P. Kraft and K. A. Muller gratefully acknowledge funding received from the HEC Paris Foundation and Labex Ecodec [Grant ANR-11-LABX-0047] and the Poole Faculty Fellowship, respectively. Supplemental Material: Data are available at https://doi.org/10.1287/mnsc.2022.4537. [ABSTRACT FROM AUTHOR]

We study the effects of implicit government guarantee (IGG) on Chinese state-owned enterprises (SOEs). We find that SOEs reduce their investments by 2.4% of book assets, on average, relative to matched non-SOEs after the first SOE default in China's onshore bond markets in 2015. The investment reduction concentrates among SOEs that are financially constrained, yet SOEs financed by large state banks are hardly affected. Bondholders require more stringent default protection in newly issued SOE bonds. We also find that the investment reduction is more pronounced for SOEs with severe agency problems and that SOEs experienced more positive market reactions to acquisition announcements after 2015. Our results suggest that the reduction in IGG has confounding effects on Chinese firms. Although the weakening of IGG may help mitigate overinvestment, it exacerbates financial constraints of those with limited access to alternative sources of financing. This paper was accepted by Lucas Schmid, finance. Funding: Z. Zhang acknowledges the funding support by Research Grants Council of Hong Kong [Project 11503318]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4483. [ABSTRACT FROM AUTHOR]

Job rotation inside an organization creates two conflicting effects. It disciplines agents by creating the fear that their successors may discover and report their hidden information. Thus, the agent takes actions that align with the principal's objective. However, job rotation can create a moral hazard problem. If information is soft and therefore, nonverifiable, the principal cannot attribute blame to the agent or the successor. Agents shirk, thereby hurting performance. Thus, the importance of disciplining versus moral hazard effects depends on the availability of hard information. Using unique loan-level data, we show that job rotation hinders performance when the information is soft. This paper was accepted by Giesecke Kay, finance. [ABSTRACT FROM AUTHOR]

Previous empirical studies find that lottery-like stocks significantly underperform their non-lottery-like counterparts. Using five different measures of the lottery features in the literature, we document that the anomalies associated with these measures are state dependent: the evidence supporting these anomalies is strong and robust among stocks where investors have lost money, whereas among stocks where investors have gained profits, the evidence is either weak or even reversed. Several potential explanations for such empirical findings are examined, and we document support for the explanation based on reference-dependent preferences. Our results provide a unified framework to understand the lottery-related anomalies in the literature. This paper was accepted by Tyler Shumway, finance. [ABSTRACT FROM AUTHOR]

Financially constrained borrowers have the incentive to influence the appraisal process in order to increase borrowing or reduce the interest rate. We document that the average valuation bias for residential refinance transactions is above 5%. The bias is larger for highly leveraged transactions, around critical leverage thresholds, and for transactions mediated through a broker. Mortgages with inflated valuations default more often. Lenders account for 60%-90% of the bias through pricing. [ABSTRACT FROM AUTHOR]

We consider default by firms that are part of a single clearing mechanism. The obligations of all firms within the system are determined simultaneously in a fashion consistent with the priority of debt claims and the limited liability of equity. We first show, via a fixed-point argument, that there always exists a "clearing payment vector" that clears the obligations of the members of the clearing system, under mild regularity conditions, this clearing vector is unique Next, we develop an algorithm that both clears the financial system in a computationally efficient fashion and provides information on the systemic risk faced by the individual system firms. Finally, we produce qualitative comparative statics for financial systems. These comparative statics imply that, in contrast to single-firm results, even unsystematic, nondissipative shocks to the system will lower the total value of the system and may lower the value of the equity of some of the individual system firms. [ABSTRACT FROM AUTHOR]