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We study how Institutional Shareholder Services (ISS) affect firms' engagement with shareholders. Our analyses exploit a quasi-natural experiment using say-on-pay voting outcomes near a threshold that triggers ISS to review engagement activities. Firms receiving ISS treatment exhibit swift and substantive increases in extensive and intensive margins of engagement, especially when their boards have higher agency conflicts and directors are more likely to lose voting support from ISS. Increases in engagement persist over time, and shareholders appear to value the increased engagement. Collectively, we shed light on an unexplored channel through which ISS positively influences firms' governance and information environments. [ABSTRACT FROM AUTHOR]

We analyze a dynamic credit market where banks choose lending standards, modeled as costly effort to screen out bad borrowers. Tighter standards worsen the borrower pool, increasing banks' incentives to employ tight standards in the future. This dynamic complementarity in lending standards can amplify and prolong downturns, decreasing lending and increasing credit spreads. Because lending standards have negative externalities, the market can converge to a steady state with inefficiently tight lending standards. We discuss the role of optimal policy to avoid this outcome as well as the impact of balance sheet costs on lending standards. [ABSTRACT FROM AUTHOR]

Financial markets reveal information that firm managers can utilize when making equity value-enhancing investment decisions. However, for firms with risky debt, such investments are not necessarily socially efficient. Despite this friction, we show that learning from prices improves investment efficiency. This effect is asymmetric, however, as investors learn less about projects that decrease the riskiness of cash flows: efficiency is lower for diversifying investments than for focusing (risk-increasing) investments. This also implies that investors' endogenous learning further attenuates risk shifting but amplifies debt overhang. Our model provides a novel channel through which learning from financial markets affects agency frictions between stakeholders. [ABSTRACT FROM AUTHOR]

We propose a security design model in which a potential acquirer approaches a firm with a value-add plan. The target has a single owner, who possesses private information: he alone knows whether his firm is compatible with the plan. The owner agrees that the acquirer will add value but believes that the value-add will not be as much as what the acquirer expects. Although the acquirer can choose any monotone limited liability security to offer along with cash, we show that, under general conditions, any security that is employed always takes the form of nonrecourse debt provided by the seller. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online [ABSTRACT FROM AUTHOR]

We consider a model in which a security issuer can manipulate information observed by a credit rating agency (CRA). We show that stricter screening by the CRA can sometimes lead to increased manipulation by the issuer. Accounting for the issuer's behavior pulls optimal CRA screening toward the extremes of laxness or stringency. Surprisingly, an improvement in prior asset quality can result in more rating errors. In a two-period version of the model, stricter screening can result in more short-run rating errors. Our results suggest complex interplay between issuer and CRA behavior, complicating the evaluation of CRA policy effectiveness. [ABSTRACT FROM AUTHOR]

Motivated by investor criticisms of current accounting standards, this study investigates whether differences exist in how acquired identifiable intangible assets relate to investors' expectations about the entity's cash flow prospects. Some investors assert that all acquired intangibles should be subsumed within goodwill, while others prefer separate recognition of identifiable intangibles only when they are strategically important sources of future cash flows. Still other investors call for separate recognition from goodwill only when identifiable intangibles are separable from the business, have defined useful lives, and have identifiable revenue streams (i.e., "wasting" intangibles). Consistent with some investor views, we find cross-sectional variation in the value relevance of identifiable intangibles based on differences in underlying asset characteristics. Our primary findings suggest that strategically important and wasting intangibles provide information different from that provided by goodwill. These findings inform standard setters as they evaluate recognition and disclosure alternatives for identifiable intangible assets. [ABSTRACT FROM AUTHOR]

Purpose: The effectiveness of microfinance institutions (MFIs) in rescuing poor borrowers from "clutches of" moneylenders has been a much-debated topic over the past few decades. This paper aims to contribute by presenting a model of competition between a socially motivated MFI and profit-maximizing moneylenders when market segmentation exists. Design/methodology/approach: A principal–agent model is used to characterize equilibrium conditions under scenarios where only moneylenders operate, only MFI operates and when both co-exist to pose comparative results effectively. Findings: The authors find unambiguous benefits arising when a welfare-maximizing MFI enters the market. However, there are benefits to having local agents like moneylenders on the ground who also have informational advantages. Originality/value: To the best of authors' knowledge, this study is the first to evaluate the competition between MFI and moneylenders under the framework of captive and noncaptive segments with a mandatory savings requirement. [ABSTRACT FROM AUTHOR]

We offer a simple analysis of the problem of choosing a statistical experiment to optimize the induced distribution of posterior medians or, more generally, q‐quantiles for any q ∈ (0,1). We show that a single experiment—the q‐quantile matching experiment—implements all implementable distributions of posterior q‐quantiles, with different distributions spanned by different selections from the sets of posterior q‐quantiles. A dense subset of implementable distributions of posterior q‐quantiles can be uniquely implemented by perturbing the q‐quantile matching experiment. A linear functional is optimized over distributions of posterior q‐quantiles by taking the optimal selection from each set of posterior q‐quantiles. The q‐quantile matching experiment is the only experiment that simultaneously implements all implementable distributions of posterior q‐quantiles. [ABSTRACT FROM AUTHOR]

We present a unified duality approach to Bayesian persuasion. The optimal dual variable, interpreted as a price function on the state space, is shown to be a supergradient of the concave closure of the objective function at the prior belief. Strong duality holds when the objective function is Lipschitz continuous. When the objective depends on the posterior belief through a set of moments, the price function induces prices for posterior moments that solve the corresponding dual problem. Thus, our general approach unifies known results for one‐dimensional moment persuasion, while yielding new results for the multidimensional case. In particular, we provide a condition for the optimality of convex‐partitional signals, derive structural properties of solutions, and characterize the optimal persuasion scheme when the state is two‐dimensional and the objective is quadratic. [ABSTRACT FROM AUTHOR]

We study the existence of efficient auctions in private value settings in which some bidders form their expectations about the distribution of their competitor's bids based on the accessible data from past similar auctions consisting of bids and ex post values. We consider steady states in such environments with a mix of rational and data‐driven bidders, and we allow for correlation across bidders in the signal distributions about the ex post values. After reviewing the working of the approach in second‐price and first‐price auctions, we establish our main result that there is no efficient auction in such environments. [ABSTRACT FROM AUTHOR]

We study a mechanism that gives students the option of paying higher tuition to attend their preferred schools. This seat‐purchasing mechanism is neither strategyproof nor stable. Our paper combines administrative and survey data to estimate students' preferences and conducts welfare analysis. We find that changing from a deferred acceptance mechanism to the cadet‐optimal stable mechanism reduces students' welfare but that adopting the observed seat‐purchasing mechanism alleviates this welfare loss. Moreover, students from affluent communities prefer to pay higher tuition to stay at preferred schools, while those from less affluent communities are more likely be priced out to lower‐quality schools. [ABSTRACT FROM AUTHOR]

We study the observability of investors' information-acquisition activities in financial markets. Improving observability leads to two strategic effects on information acquisition: (1) the pricing effect, which arises from interactions between investors and the market maker and can encourage or discourage information acquisition, and (2) the competition effect, which concerns interactions among investors and always encourages information acquisition. We apply our theory to study voluntary and mandatory disclosures of corporate site visits. When the competition effect dominates, investors voluntarily disclose their visits. When the pricing effect dominates, mandatory disclosure is effective. Our analysis sheds novel light on Regulation Fair Disclosure. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

We investigate the effect of scrutiny (e.g. credit ratings, analyst reports, or mandatory disclosures) on the security design problem of a privately informed issuer. We show that scrutiny has important implications for both the form of security designed and the amount of inefficient retention of cash flows. The model predicts that issuers will design informationally sensitive securities (i.e. levered equity) when scrutiny is sufficiently intense. Otherwise, issuers opt for a standard debt contract. Scrutiny increases efficiency by decreasing issuers' reliance on retention to signal quality and, perhaps counterintuitively, decrease price informativeness. [ABSTRACT FROM AUTHOR]

This paper develops a theory that generates an equilibrium relationship between product complexity, transparency, and trust in firms. Complexity, transparency, and the evolution of trust are all endogenous, and equilibrium transparency is nonmonotonic. The least-trusted firms choose the lowest product complexity, remain opaque, and substitute ex ante third-party verification for information disclosure and trust. Firms with an intermediate level of trust choose an intermediate level of complexity and transparency through disclosure, with more trusted firms choosing greater complexity and lower transparency. The most-trusted firms choose maximum complexity while remaining opaque, eschewing both verification and disclosure. [ABSTRACT FROM AUTHOR]

Purpose: This paper aims to investigate whether managerial overconfidence has an impact on investment inefficiency beyond its influence on the use of internal financing or whether internal financing behaves as a full intermediary. Design/methodology/approach: The study employed three dependent variables, namely business investment scale, overinvestment and underinvestment, and analyzed data from 282 firms across five different industries listed in 11 Middle East/North Africa (MENA) countries between 2013 and 2019 using regression analysis via least square dummy variable (LSDV). Findings: The findings indicate that while internal financing can provide funding for investment opportunities and address capital shortages, it may also result in overinvestment, particularly in companies led by overconfident managers. Practical implications: Stakeholders, including shareholders and board of directors, should pay attention to the chief executive officer (CEO)'s behavioral aspects such as overconfidence in decision-making while undertaking new investment projects. Additionally, regulators and policymakers in emerging markets like MENA should re-evaluate the corporate governance framework, devise a corporate governance index and promote boardroom gender diversity as it can significantly reduce risk. Originality/value: This study adds to the limited research on the impact of managerial overconfidence on investment efficiency in the MENA region. By focusing on this region, which has unique economic, political and social characteristics, the study provides new insights into the role of behavioral biases in investment decision-making in emerging markets. [ABSTRACT FROM AUTHOR]

We study the interaction between noisy demand and skewed asset payoffs. In our model, price as a function of quantities is convex in a neighborhood around zero if and only if skewness is positive. The combination of convexity and noise produces the idiosyncratic skewness effect, a documented negative relationship between an asset's idiosyncratic skewness and its expected return. We further offer an explanation for the idiosyncratic volatility puzzle. Finally, our theory predicts that higher idiosyncratic skewness strengthens the idiosyncratic volatility effect (and vice versa). We find support for this prediction in the cross-section of stock returns. [ABSTRACT FROM AUTHOR]

AbstractReducing carbon dioxide emissions in the aviation industry is a formidable challenge. Understanding airline travellers’ willingness to pay for emission reductions could lead to impactful changes in flight pricing and government policies. In this study, we employ a discrete choice experiment to more accurately gauge this willingness to pay. The experiment features a comprehensive analysis of both leisure and business traveller categories, utilising a realistic interface mirroring Google Flights for journeys between Los Angeles and New York. The findings demonstrate that, on average, business flyers exhibit a significantly higher willingness to pay for emission reductions compared to leisure flyers. Notably, a subset of emissions conscious leisure flyers also exhibits a markedly higher willingness to pay. Latent class modelling indicates that this emissions conscious group accounts for about 42% of the leisure flyer sample. The larger group of price focused leisure flyers does not display any significant willingness to pay for emission reduction. Another key finding is that ethical consumption behaviour, not just stronger perceptions related to climate change, is linked to emissions-reducing preferences among both types of flyers. These results provide valuable insights for policy and pricing strategies, emphasising the heterogeneity across and within the business and leisure flyer segments. [ABSTRACT FROM AUTHOR]

We follow workers' performance along an unbalanced panel dataset over multiple years and study how performance varies at the end of fixed-term contracts, in a labour market where some people face a mobility-restricting clause (i.e. a noncompete clause). Focusing on the labour market of the National Hockey League, we analyse players' performance data and contracts with a fixed-effects estimator to address empirical limitations in previous studies. We find that, on average, National Hockey League players' performance does not vary. However, our estimations detect substantially heterogeneous behaviours, depending on tenure, perceived expected performance, and mobility. Only younger players (i.e. restricted free agents) with high expected mobility but low expected performance tend to behave strategically and perform better. Differently, older players (i.e. unrestricted free agents) with high expected mobility tend to underperform, as the option of moving back to European tournaments is more appealing. [ABSTRACT FROM AUTHOR]

When both a buyer and a seller have private information about their valuations of the same object, they trade the object less efficiently. A better-informed agent than the buyer and the seller can facilitate trade more efficiently by advising them with the agent's information. However, the agent's interest affects the validity of the agent's advice and thus trade outcomes. When the agent's interest is to maximize the trade probability rather than the expected transaction price, the agent is more likely to share the agent's information with both the buyer and the seller. The information provided by the agent raises not only the trade probability but also the expected transaction price. Therefore, the attempt of the agent to raise the expected transaction price may fail, whereas the one to increase the trade probability succeeds. [ABSTRACT FROM AUTHOR]

Building trust is a major challenge in digital crowdfunding environments. The existing information asymmetries between fund-seeking entrepreneurs and potential investors require the implementation of signaling strategies between both economic agents in order to generate trust and incentivize investment. This study performs a qualitative comparative analysis (QCA) to explore the interplay of visual content and social networks as information cues signaling trust. The data are sourced from Startupxplore, a Spanish equity crowdfunding platform. Configurational analysis reveals a certain degree of substitutability between traditional visual cues (images, videos) and reporting presence in social networks (Instagram, Facebook, Twitter). The results show different information disclosure strategies using traditional visual cues and social networks that lead to crowdfunding success and overfunding: substitute, mixed and unique strategies. The originality of this research lies in identifying such strategies using a configurational approach that addresses the causal complexity behind success and overfunding phenomena in equity crowdfunding, and in targeting visual cues and social networks presence as signals. This entails theoretical contributions to signaling theory in digital financial environments as well as managerial implications for entrepreneurial fundraising. [ABSTRACT FROM AUTHOR]

We extend Stiglitz (J Public Econ, 17, 213–240,1982) to a dynamic and stochastic optimal taxation model, while assessing the effects of exogenous wage regulations. We show that when wage regulations are imposed, consumption inequality rises more than when they are removed. The results lead to an important policy implication that in the face of exogenous wage regulations, the social planner who can design optimal tax schedule prefers to widen the consumption inequality. From this perspective, the drive to enhance production efficiency outweighs the motivation for redistribution. A conventional wisdom that full employment commitment and minimum wage legislation should serve as a buffer for the minority may not be taken for granted. In the qualitative analysis, we find that as wage regulations tighten, the lower bound of the marginal tax rate on capital rises. Our quantitative result validates that, showing that the marginal tax rate on capital increases to varying degrees in response to wage requirements of varying tightness. [ABSTRACT FROM AUTHOR]

We study the effectiveness of shareholder engagement, that is, shareholders communicating their views to management. When shareholders and management have different beliefs, each shareholder engages more effectively when other shareholders engage as well. A limited shareholder base can thus prevent effective engagement. However, a limited shareholder base naturally arises under heterogeneous beliefs because investors who most disagree with management do not become shareholders. Passive funds, which own the firm regardless of their beliefs, can counteract these effects and improve engagement. When shareholders' and management's preferences are strongly misaligned, shareholders' engagement decisions become substitutes and the role of ownership structure declines. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

Using satellite imagery of retail firms' parking lots to measure time-varying local firm-specific performance, we document that analysts incorporate local information into their forecasts. Analysts rely more on local signals when less firm-wide information is available. This incorporation of noisy local firm information has firm-level implications. Examining across industries, we find causal evidence that geographic concentration of analysts increases consensus forecast errors and decreases firm liquidity. These effects are stronger for harder-to-value stocks. The market values geographic firm information, as the abnormal return around forecast revisions is higher for analysts who cover a firm from a unique location. [ABSTRACT FROM AUTHOR]