Research Lab

Active investors provide entrepreneurs with risk-sharing and value-adding effort, e.g., in form of advising, networking and monitoring. However, holdup problems may create a conflict between two key objectives for high-quality entrepreneurs: to elicit investor effort and to credibly signal their firm type by retaining shares. As a result, pooling of startup firms of different types may arise, in particular when investor effort is essential. More established firms, with access to multiple signals, can always realize both of these objectives.

The preferred risk habitat hypothesis, introduced here, is that individual investors select stocks whose volatilities are commensurate with their risk aversion. The data, 1995-2000 holdings of over 20,000 clients at a large German broker, are consistent with the predictions of the hypothesis: the portfolios contain highly similar stocks in terms of volatility, when stocks are sold they are replaced by stocks of similar volatilities, and the more risk averse customers indeed hold and trade into less volatile stocks.

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.

In this paper, we develop a structural model that captures the interaction between the cash balance and investment opportunities for a firm that already has some debt outstanding. We consider a firm whose assets produce a stochastic cash flow stream. The firm has an opportunity to expand its operations, which we refer to as an "option the expand." The exercise cost of the option can be financed either by cash or costly equity issuance.

In this paper, I use anecdotal evidence and logical reasoning to suggest that, despite the use of an extensive database, it is not possible to conclude that passage of the Sarbanes Oxley Act did not have an impact on companies' delisting decisions. Moreover, the instrumental variables used to proxy for SOX effects are too weak and suffer from a significant endogeneity problem given that passage of SOX was driven by many of the economic and control problems that are used to control for market and company factors.

Accounting is often criticized for omitting intangible assets from the balance sheet. This paper points out that the omission is not necessarily a deficiency. There is also an income statement, and the value of intangible (and other) assets can be ascertained from the income statement. Thus, calls for the recognition of "intangible assets" on the balance sheet may be misconceived. The paper lays out the property whereby the income statement corrects for deficiencies in the balance sheet.