Research Lab

Having invested multiple billion dollars of pension assets, and now teaching "Institutional Investing; Alternatives in Pension Plans," I approach this question with theoretical and empirical knowledge, and more than a modicum of trepidation.

This paper presents a comprehensive analysis of mortgage delinquency between 2004 and 2008 using a unique loan-level dataset from a major national mortgage bank. Our analysis highlights two major problems underlying the mortgage crisis: a heavy reliance on mortgage brokers who tend to originate lower quality loans, and a high prevalence of low-documentation loans—known in the industry as "liars' loans"—which results in information falsification by borrowers.

We structurally estimate a model in which agents' information processing biases can cause predictability in firms' asset returns and investment inefficiencies. We generalize the neoclassical investment model by allowing for two biases — overconfidence and over-extrapolation of trends — that distort agents' expectations of firm productivity. Our model's predictions closely match empirical data on asset pricing and firm behavior. The estimated bias parameters are well-identified and exhibit plausible magnitudes.

How do firms repair their reputations after a serious accounting restatement? To answer this question, we review firms' press releases and identify 1,765 reputation-building actions taken by: (1) 94 restating firms in the periods before and after their restatement; and (2) a set of matched control firms during contemporaneous periods.

The basic premise of this paper is that academic accountants and financial accounting standard setters have traded places in their normative vs positive orientations. Academics have shifted from normative to positive, while standard setters have shifted from positive to normative.

We provide conditions under which contingent claim and asset demands are consistent with state independent Expected Utility maximization. The paper focuses on the case of a single commodity and demands are allowed to be functions of probabilities and not just prices and income.

We investigate a prominent allegation in congressional hearings that Moody's loosened its rating standards to chase revenue after it went public in 2000. Consistent with this allegation, Moody's ratings for both corporate bonds and structured finance products are significantly more favorable to issuers, relative to S&P's, after Moody's IPO. Moreover, Moody's ratings are more favorable for clients subject to greater conflict of interest.

Maintaining auditor independence is vital to the auditing profession. This article argues that the auditor-client relationship exhibits special traits that make maintaining auditor independence easier than in other accountant-client relationships. In particular, the auditor-client relationship satisfies a one-sided separability condition, as the auditor is not involved in the structuring of transactions (unlike other accountants).

Risk free asset demand in the classic portfolio problem is shown to decrease with income if and only if the consumer's uncertainty preferences over assets satisfy the preference condition that the risk free asset is more readily substituted for the risky asset as the quantity of the latter increases. In this case, the risky asset is said to be "urgently needed" following the terminology of the classic certainty analysis of Johnson (1913). The urgently needed property tends to be more readily satisfied in uncertainty versus certainty settings.