Corporate Finance

The paper provides empirical evidence that strategic complementarities among investors generate fragility in financial markets. Analyzing mutual fund data, we find that, consistent with a theoretical model, funds with illiquid assets (where complementarities are stronger) exhibit stronger sensitivity of outflows to bad past performance than funds with liquid assets. We also find that this pattern disappears in funds where the shareholder base is composed mostly of large investors.

The banking legislation of the 1930s took very little time to pass, was unusually comprehensive, and unusually responsive to public opinion. Ironically, the primary motivations for the main bank regulatory reforms in the 1930s (Regulation Q, the separation of investment banking from commercial banking, and the creation of federal deposit insurance) were to preserve and enhance two of the most disastrous policies that contributed to the severity and depth of the Great Depression — unit banking and the real bills doctrine.

Financial crises appear to be a common and fairly constant feature of the economic cycle. Banking crises, a distinct subset of financial crises, consist either of panics, moments of temporary confusion about the unobservable incidence across the financial system of observable aggregate shocks, or severe waves of bank failures which result in aggregate negative net worth of failed banks in excess of one percent of GDP.

As we contemplate the raft of regulatory reforms currently being proposed, it is important not only to consider the content of regulation, but also its structure. In particular, it is important to ask how the role of the Fed as a regulator should change, and how the targets and the tools of monetary and regulatory policy should adapt to new regulatory mandates. For example, some reform proposals envision a dramatic expansion of Fed regulatory authority, while others do not, and some proposals envision the Fed's using monetary policy to prick asset bubbles, while others do not.

Urban success increasingly has taken two different forms in the post-war era. One involves very high house price growth with relatively little population growth. The other pairs strong population expansion with mild house price appreciation. We document the heterogeneity across MSAs in the long-run house price growth rate and show that house price growth and housing unit growth tend to be inversely related. Income growth, too, varies widely across MSAs and high house price growth markets experience both high income growth and a right-shift of their entire income distribution.

This paper studies the connection between risk taking and executive compensation in financial institutions.

By reducing the threat of a hostile takeover, business combination (BC) laws weaken corporate governance and increase the opportunity for managerial slack. Consistent with the notion that competition mitigates managerial slack, we find that while firms in non-competitive industries experience a significant drop in operating performance after the laws' passage, firms in competitive industries experience no significant effect. When we examine which agency problem competition mitigates, we find evidence in support of a "quiet-life" hypothesis.

Under accrual accounting, earnings add to shareholders' equity. Cash flow generated by a business has no effect on the book value of shareholders' equity but reduces the book value of net assets employed in business operations. In short, accrual accounting rules prescribe that earnings add to shareholder value, but cash flow is irrelevant to the valuation of equity. This paper documents that the stock market prices equity shares according to this prescription.