Are All Inside Directors the Same? Evidence from the External Directorship Market

Agency theory and optimal contracting theory posit opposing roles and shareholder wealth effects for corporate inside directors. We evaluate these theories using the market for outside directorships to differentiate among inside directors. Firms with inside directors holding outside directorships have better operating performance and market‐to‐book ratios, especially when monitoring is more difficult. These firms make better acquisition decisions, have greater cash holdings, and overstate earnings less often. Announcements of outside board appointments improve shareholder wealth, while departure announcements reduce it, consistent with these inside directors improving board performance and outside directorships being an important source of inside director incentives.     

Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?

Financial development is critical for growth, but its microdeterminants are not well understood. We test leading theories of low demand for financial services in emerging markets, combining novel survey evidence from Indonesia and India with a field experiment. We find a strong correlation between financial literacy and behavior. However, a financial education program has modest effects, increasing demand for bank accounts only for those with limited education or financial literacy. In contrast, small subsidies greatly increase demand. A follow‐up survey confirms these findings, demonstrating that newly opened accounts remain open and in use 2 years after the intervention.     

Not All Related Party Transactions (RPTs) Are the Same: Ex Ante Versus Ex Post RPTs

Related party transactions (RPTs) are potential means for insiders to expropriate outside shareholders via self‐dealing. There are, however, possible benefits to these arrangements for outside shareholders. We find that the overall volume of disclosed RPTs is generally not significantly associated with shareholder wealth as measured by operating profitability or Tobin's Q. However, the results for total RPT volume obscure that ex ante RPTs, transactions that predate a counterparty becoming a related party, are innocuous at worst in terms of their association with operating profitability and significantly positively associated with Tobin's Q whereas ex post RPTs, transactions initiated after a counterparty becomes a related party, are significantly negatively associated with operating profitability. Ex post RPTs also result in significant share price declines when first disclosed and are associated with an increased likelihood that a firm will enter financial distress or deregister its securities. These results are consistent with ex post RPTs serving as means for insiders to expropriate outside shareholders.     

CEO Inside Debt Incentives and Corporate Tax Sheltering

This paper examines the relation between CEO inside debt holdings (pension benefits and deferred compensation) and corporate tax sheltering. Because inside debt holdings are generally unsecured and unfunded liabilities of the firm, CEOs are exposed to risk similar to that faced by outside creditors. As such, theory (Jensen and Meckling [1976]) suggests that inside debt holdings negatively impact CEO risk‐appetite. To the extent that corporate tax shelters are likely to result in high cash flow volatility in the future, we expect that inside debt holdings will curb CEOs from engaging in tax shelter transactions. Consistent with the prediction, we document a negative association between CEO inside debt holdings and tax sheltering. Additional analyses suggest that the effect of inside debt on tax sheltering is more (less) pronounced in the presence of high default risk and liquidity threats (cash‐out options in pension packages). Overall, our results highlight the importance of investigating the implication of CEO debt‐like compensation for corporate tax policies.     

Does Corporate Transparency Contribute to Efficient Resource Allocation?

This paper examines whether a country's corporate transparency environment, which includes the quality of accounting information, contributes to efficient resource allocation. Based on a cross-country study of 37 manufacturing industries in 37 countries, we provide three pieces of related evidence. First, we find the contemporaneous correlations in industry growth rates across country pairs are higher when there is a greater level of corporate transparency in the country pairs, after controlling for country-level economic and financial development. Second, we find the influence of transparency on these correlations is stronger when country pairs are at similar levels of economic development (GDP). Finally, when we control for the level of transparency explained by a country's institutions in place, we find that residual transparency (unexplained by country-level factors) is associated with industry-specific growth rates. Taken together, the results are consistent with corporate transparency facilitating the allocation of resources across industry sectors.     

Proprietary Costs and the Disclosure of Information About Customers

In deciding how much information about their firms’ customers to disclose, managers face a trade off between the benefits of reducing information asymmetry with capital market participants and the costs of aiding competitors by revealing proprietary information. This paper investigates the determinants of managers’ choices to disclose information about their firms’ customers using a comprehensive data set of customer‐information disclosures over the period 1976–2006. We find robust evidence in support of the hypothesis that proprietary costs are an important factor in firms’ disclosure choices regarding information about large customers.     

Corporate Equity Ownership and the Governance of Product Market Relationships

We assemble a sample of over 10,000 customer–supplier relationships and determine whether the customer owns equity in the supplier. We find that factors related to both contractual incompleteness and financial market frictions are important in the decision of a customer firm to take an equity stake in their supplier. Evidence on the variation in the size of observed equity positions suggests that there are limits to the size of optimal ownership stakes in many relationships. Finally, we find that relationships accompanied by equity ownership last significantly longer than other relationships, suggesting that ownership aids in bonding trading parties together.     

Asymmetric Monetary Policy in Australia*

We find evidence for asymmetric behaviour in Australian monetary policy. During 1984–1990, the Reserve Bank of Australia acted with considerable discretion yielding poor performance of an interest rate rule. However, it behaved asymmetrically to inflation and the output gap in downturns and upturns. On embracing inflation targeting from 1991, it enhanced its credibility by anchoring inflation expectations. Not only did its actions become more predictable in 1991–2002, it responded asymmetrically only to output, switching to act more acutely in downturns. Although its asymmetric behaviour could result from asymmetric preferences or non‐linear aggregate supply, our results support the former explanation.     

Incentivizing Calculated Risk‐Taking: Evidence from an Experiment with Commercial Bank Loan Officers

We conduct an experiment with commercial bank loan officers to test how performance compensation affects risk assessment and lending. High‐powered incentives lead to greater screening effort and more profitable lending decisions. This effect is muted, however, by deferred compensation and limited liability, two standard features of loan officer compensation contracts. We find that career concerns and personality traits affect loan officer behavior, but show that the response to incentives does not vary with traits such as risk‐aversion, optimism, or overconfidence. Finally, we present evidence that incentives distort the assessment of credit risk, even among professionals with many years of experience.