Buyout Activity: The Impact of Aggregate Discount Rates

Buyout booms form in response to declines in the aggregate risk premium. We document that the equity risk premium is the primary determinant of buyout activity rather than credit‐specific conditions. We articulate a simple explanation for this phenomenon: a low risk premium increases the present value of performance gains and decreases the cost of holding an illiquid investment. A panel of U.S. buyouts confirms this view. The risk premium shapes changes in buyout characteristics over the cycle, including their riskiness, leverage, and performance. Our results underscore the importance of the risk premium in corporate finance decisions.     

The Effect of Regulatory Harmonization on Cross‐Border Labor Migration: Evidence from the Accounting Profession

The paper examines whether international regulatory harmonization increases cross‐border labor migration. To study this question, we analyze European Union initiatives that harmonized accounting and auditing standards. Regulatory harmonization should reduce economic mobility barriers, essentially making it easier for accounting professionals to move across countries. Our research design compares the cross‐border migration of accounting professionals relative to tightly matched other professionals before and after regulatory harmonization. We find that international labor migration in the accounting profession increases significantly relative to other professions. We provide evidence that this effect is due to harmonization, rather than increases in the demand for accounting services during the implementation of the rule changes. The findings illustrate that diversity in rules constitutes an economic barrier to cross‐border labor mobility and, more specifically, that accounting harmonization can have a meaningful effect on cross‐border migration.     

EVOLUTION OF GENDER DIFFERENCES IN POST‐SECONDARY HUMAN CAPITAL INVESTMENTS: COLLEGE MAJORS

Although women in the United States now complete more college degrees than men, the distribution of college majors among college graduates remains unequal, with women about two‐thirds as likely as men to major in business or science. We develop and estimate a dynamic, overlapping generations model of human capital investments and labor supply. We allow for specific college major choices, instead of aggregating these choices to the education level. Results show that changes in skill prices, higher schooling costs, and gender‐specific changes in home value were each important to the long‐term trends.     

The Impact of Supervision on Bank Performance

We explore the impact of supervision on the riskiness, profitability, and growth of U.S. banks. Using data on supervisors' time use, we demonstrate that the top-ranked banks by size within a supervisory district receive more attention from supervisors, even after controlling for size, complexity, risk, and other characteristics. Using a matched sample approach, we find that these top-ranked banks that receive more supervisory attention hold less risky loan portfolios, are less volatile, and are less sensitive to industry downturns, but do not have lower growth or profitability. Our results underscore the distinct role of supervision in mitigating banking sector risk.     

PRICE DISPERSION AND COMPETITION WITH DIFFERENTIATED SELLERS*

I measure price dispersion among differentiated retail gasoline sellers and study the relationship between dispersion and the local competitive environment. Significant price dispersion exists even after controlling for differences in station characteristics, and price differences between sellers change frequently. The extent of price dispersion is related to the density of local competition, but this relationship varies significantly depending on the type of seller and the composition of its competitors. These findings are consistent with interactions between seller and consumer heterogeneity that are not well understood in the existing price dispersion literature.     

Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants

We investigate the effect of growth opportunities in a firm's investment opportunity set on its joint choice of leverage, debt maturity, and covenants. Using a database that contains detailed debt covenant information, we provide large‐sample evidence of the incidence of covenants in public debt and construct firm‐level indices of bondholder covenant protection. We find that covenant protection is increasing in growth opportunities, debt maturity, and leverage. We also document that the negative relation between leverage and growth opportunities is significantly attenuated by covenant protection, suggesting that covenants can mitigate the agency costs of debt for high growth firms.     

THE USEFULNESS OF IMPERFECT ELECTIONS: THE CASE OF VILLAGE ELECTIONS IN RURAL CHINA

Using a sample of rural Chinese villages, which have recently been the subject of democratic reforms, we look for relationships between marginal changes in the democratic process and marginal changes in economic outcomes. We find that even very poorly conducted elections can have large incentive effects. That is, even corruptible elections provide leaders with strong incentives to act in the interests of their constituents. Our findings also allow us to rank the importance of four possible election reforms, which have attracted the attention of international observers and academic researchers.     

A Risk‐Dominant Allocation: Maximizing Coalition Stability

This paper presents a rule to allocate a coalition’s worth for superadditive games with positive externalities. The allocation rule awards each member their outside payoff, plus an equal share of the surplus. The resulting allocation maximizes coalition stability. Stable coalitions are Strong Nash equilibria since no subset of members has an incentive to leave. Similarly, no subset of non‐members has an incentive to join a stable coalition if the game is concave in this region. The allocation is risk‐dominant. All stable coalitions are robust to the maximum probability of 50% that players’ deviate from their individual best‐responses. The paper compares the allocation to the Shapley value and the Nash bargaining solution, and illustrates why these traditional rules result in small coalitions when applied to issues such as international environmental agreements.     

NEGATIVE EXTERNALITIES,COMPETITION AND CONSUMER CHOICE*

Consumers sometimes make choices that impose greater external costs on those who do not make the same choice. This paper examines how the selectivity of negative externalities in such situations affects the competitive equilibrium and the desirability of an externality‐reducing public policy. Selective negative externalities create network externalities, but outcomes may differ greatly from typical network effects. Price effects may cause the imposing product's sales to decline with the size of the negative externality. Consequently, a positive competitive effect may overwhelm the externality's negative direct effects on welfare, such that a policy that enlarges the externality may improve welfare.