We conceptualize equity incentive contracting as a dynamic process in which contracting frictions limit the speed at which equity incentives adjust to target levels. Slower adjustment speeds imply more prolonged deviations from value-maximizing targets and thus more severe negative effects on future performance. We find that contracting frictions significantly slow the speed of adjustment to target incentives (SOA). Consistent with frictions prolonging the persistence of deviations from target, we find that contracting frictions magnify the negative influence of deviations on future firm performance. Further, we find that the influence of contracting frictions on SOA operates through boards' equity grant decisions. Our dynamic contracting perspective offers new insight into the relation between CEO incentives and firm performance by providing novel evidence that the speed of convergence to target incentives is a defining feature of the dynamic contracting process that translates inefficiency effects of contracting frictions into lower future performance. Data Availability: All data are publicly available from sources indicated in the text.

We investigate how firm-level partisanship influences interactions between banks in the syndicated loan market. Because politically divergent banks hold conflicting perceptions of economic conditions, ideological distance between banks impedes consensus and elevates expected coordination costs. We find that greater political distance between a lead arranger and a participant reduces the participant’s likelihood of joining a syndicate and lowers its retained loan share relative to the lead. The relation between political distance and loan share differences intensifies during periods of high national political polarization. Moreover, greater political diversity within a syndicate is associated with less restrictive loan covenants and higher interest spreads, reflecting a trade-off where lenders sacrifice contingent control to avoid costly renegotiation gridlock. Validating our disagreement mechanism, we show that following presidential elections, banks politically misaligned with the incoming administration issue significantly more pessimistic macroeconomic forecasts than aligned banks.

ABSTRACT Although activist short sellers can play a crucial role in fraud detection, they have come under scrutiny following accusations of systematically disseminating false negative information. We develop a framework delineating the roles of campaign-specific private information quality and short-selling dynamics in shaping disclosure incentives. We predict that the act of disclosure combined with pre-disclosure stock lending dynamics is informative about the quality of an activist’s private information. We find that increased pre-disclosure shorting intensity is associated with more negative post-disclosure returns, adverse media coverage, and consequential campaign outcomes, including auditor turnover, accounting restatements, class-action lawsuits, and performance-related delistings. Furthermore, elevated short-selling costs and risks magnify the association between pre-disclosure shorting intensity and post-disclosure underperformance. Finally, we examine V-shaped reversals and short covering following activists’ disclosures and find no evidence of systematic manipulation. We conclude that activists disclosing fraud allegations under their own names are discouraged from engaging in “short-and-distort” schemes. Data Availability: Data are available from the sources cited in the text. JEL Classifications: G12; G14; G23; M41.

We investigate whether improvements in banks' organizational capital and control systems facilitate increased loan origination to minority borrowers. We focus on bank supervisors' enforcement decisions and orders (EDOs) against banks and hypothesize that EDO-imposed improvements in loan policies, internal governance, and employee training mitigate deficiencies in credit assessments and lending decisions that previously disadvantaged minority borrowers. We find that mortgage origination to minority borrowers increases following the resolution of EDOs, and more so for banks with stricter supervisors or more severe EDOs. Using a semisupervised machine learning method to analyze the text of EDOs, we find that such increases are higher for EDOs specifying revisions of loan policies, implementation of formal internal governance procedures, or more employee training. Overall, we find that EDO-driven improvements in organizational capital generate unintended, positive social externalities that enhance access to credit for minority borrowers.

We hypothesize that after a relaxation of short selling constraints, an escalation in short selling activity will heighten incentives for short sellers to accelerate price discovery by revealing their negative information. Consistent with this conjecture, we find that the overall sentiment of media coverage tilts significantly more negative for pilot relative to control firms following exogenous relief of short sale constraints. We find a more pronounced effect for media-initiated articles relative to firm-initiated press releases. Further, following abnormal increases in short interest, there is a significantly greater increase in negative news flow for pilot relative to nonpilot firms. Finally, we find that stock returns of firms with lower short selling constraints become significantly more sensitive to negative news reports. This paper was accepted by Suraj Srinivasan, accounting. Funding: The authors acknowledge the financial support of the Kenan-Flagler Business School and the Naveen Jindal School of Management. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4783 .

Banks face corporate and regulatory governance pressures. A critical tool of regulatory governance is direct monitoring by bank supervisors. Supervisors assess banks using a multi-dimensional rating scheme, including a rating of top management teams (M-rating). We examine implications of M-ratings from the distinct, but complementary perspectives of managerial capital and managerial discipline. We document that better M-ratings are associated with fewer future non-performing loans and lower likelihood of bank failure. Consistent with managerial capital commanding a higher performance premium during challenging economic times, we find that higher macro-economic uncertainty magnifies the performance premium associated with M-ratings. Relatedly, the value of managerial capital is conditional on bank fundamentals, where M-ratings positively influence future performance when they exceed the composite supervisory rating but have a negative effect when lower than the composite rating. Consistent with M-ratings serving an implicit incentive role through managers’ career concerns, we document that for poorly performing banks, higher M-ratings decrease the probability of CEO turnover. Overall, our study provides the first large-sample evidence of how bank regulators assess banks’ managerial capital and how M-ratings affect bank corporate governance.

This paper investigates how bank supervisors’ enforcement decisions and orders (EDOs) influence the allocation of mortgage lending across demographic groups underlying a banks’ borrower base. Specifically, we investigate how banks’ mortgage lending to minority borrowers relative to white borrowers changes following the resolution of severe EDOs. We hypothesize that improvements in management control systems imposed by EDOs serve as channels through which EDOs affect a bank’s borrower base generally, and minority lending specifically. We empirically examine how changes in loan policies and internal governance mechanisms specified in EDOs influence banks’ mortgage lending decisions. We find that relative to white borrowers, mortgage lending to minority borrowers significantly increases following the resolution of EDOs, where this positive effect increases with the strictness of bank supervisors and severity of the EDO. Consistent with management controls serving as channels for this change, there is a more pronounced effect on minority lending when an EDO mandates improvements in lending policies and stronger internal governance over lending decisions.

We investigate whether implied volatility comovements reflect the degree to which a firm’s private information is informative about future macroeconomic news. We compute IVC, the comovement of the implied volatilities between the firm and the aggregate market. IVC measures the extent to which option investors expect the coincidence of future firm and macroeconomic information arrival. Using insider purchases as a proxy for firms’ private information and future aggregate equity returns as a proxy for macroeconomic news, we find that IVC moderates the association between firms’ private information and macroeconomic news. Consistent with this finding, we also find that firms with higher IVC have stock returns that are more informative about future aggregate earnings and have stronger aggregate market reactions to their earnings announcements. Overall, IVC effectively measures the relevance of a firm’s private information to aggregate markets.

This paper studies the role banking supervision plays in improving access to credit for minorities by investigating how enforcement decisions and orders (EDOs) affect the bank borrower base. We find that, after an EDO’s termination, banks significantly increase residential mortgage lending to minorities, even when the enforcement order is not issued for violations of fair lending laws. Our findings suggest that improvements in banks’ internal credit assessment and compliance due to the enforcement process are associated with the expansion in lending to minority borrowers. Our findings highlight the indirect social benefits of bank enforcement and supervision.

We investigate the extent to which loan officers generate independent, individual effects on the design and performance of syndicated loans. We construct a large database containing the identities of loan officers involved in structuring syndicated loan deals, allowing us to systematically disentangle borrower, bank, and loan officer fixed effects. We find that loan officers have significant influence on interest spreads, loan covenant design, and loan performance. Inclusion of borrower fixed effects increases our power to rule out the alternative that loan officer fixed effects reflect the matching of officerds to borrowers based on time-invariant borrower characteristics. We document heterogeneity in loan officers’ influence across loan contract terms, with loan officers exerting stronger influence over covenant package design than over interest spreads, but marginal influence on loan maturity. Lead officers have greater influence than participant officers over covenant package design and loan performance, but less robust differential influence on interest spreads.

This paper studies the role banking supervision plays in improving access to credit for minorities by investigating how enforcement decisions and orders (EDOs) affect bank borrower base. Despite declines in most component portfolios, we find that bank-level residential mortgage portfolios remain relatively unchanged after an EDO. We document significant changes in the underlying demographic mix of residential mortgage borrowers: after an EDO's termination, banks significantly increase residential mortgage lending to minorities. EDO banks are also less likely to deny loans to minority borrowers, and their reasons for loan denial change. We propose several mechanisms to explain why lending to minorities might increase after an EDO and find evidence consistent with EDO banks' improvements due to the enforcement process expanding lending to minorities, as well as banks catering to regulators after EDO termination.

Over the last two decades, executive compensation research has focused primarily on equity-based pay and incentives emanating from executives’ firm-specific equity portfolios, while generally ignoring cash-based bonus plans as a second order effect. Exploiting access to new data sources, there has been a revival of interest by accounting researchers in more deeply understanding the value adding roles played by bonus plans. Earlier research viewed accounting measures in bonus plans through the lens of effort incentives-risk premium trade-offs derived from classical principal-agent theory. In contrast, the recent literature emphasizes the idea that cash-based bonus plans play an important communication role in which a board’s performance measure choices reveal to outsiders the firm’s commitment to specific strategic objectives and facilitate the coordination of behavior across executives inside the firm. Public observability of bonus plans then provides a basis for investors and competitors to assess a firm’s strategic direction, and for investors to hold managers accountable for strategy execution. Building on my discussion of Bloomfield, Gipper, Kepler and Tsui (2021) in the 2020 Journal of Accounting and Economics Conference, my objective in this paper is to synthesize and critique key results from this recent literature and offer ideas for future research.

We hypothesize that after a relaxation of short selling constraints, an escalation in short selling activity will heighten incentives for short sellers to accelerate price discovery by revealing their negative information. Consistent with this conjecture, we find that the overall sentiment of media coverage tilts significantly more negative for pilot relative to control firms following exogenous relief of short sale constraints. We find a more pronounced effect for media-initiated articles relative to firm-initiated press releases. Further, following abnormal increases in short interest there is a significantly greater increase in negative news flow for pilot relative to non-pilot firms. Finally, we find that stock returns of firms with lower short selling constraints become significantly more sensitive to negative news reports.

The prevailing view of implied volatility comovements, IVC, defined as the correlation between a firm’s implied volatility and the market’s implied volatility, is that they indicate the presence of systematic volatility risk to the firm’s investors. We take a different stance and conjecture that implied volatility comovements can also indicate expected information arrival for both the firm and aggregate equity markets, and we find evidence supporting this view. Our most convincing evidence is that firms with higher implied volatility comovement have insider purchases that are more strongly associated with information about aggregate equity markets. We test whether insider purchases at these firms relate to news regarding aggregate discount rates and find little evidence of this, suggesting that information revealed by these insiders at firms with high IVC primarily informs equity markets about future market-level cash flows and earnings. We find similar evidence in other settings. Firms with higher IVC have stock returns that are more informative about future aggregate earnings surprises, and they have stronger aggregate market reactions to their earnings announcements. Our results suggest that properties of a firm’s implied volatility have important implications for the nature of information generated by the firm.

The last decade has witnessed a dramatic growth in passive investing via exchange-traded funds (ETFs). To the extent that the demand for stocks via ETF flows is not related to firm-specific fundamental values, large ETF flows may push the price of the underlying stocks away from their fundamentals-based value. In this study I provide evidence consistent with this conjecture. In particular, I first document a positive association between ETF flows and the price-tofundamentals relation of underlying stocks. Then, by using BlackRock’s expansion into the ETF business as an exogenous shock, I provide evidence that the association is likely to be causal rather than reflect some form of endogeneity (i.e., ETFs selecting certain stocks). Also, I find that highflow firms subsequently underperform low-flow firms in operating and stock performance, consistent with the misvaluation being caused by non-fundamental demand shocks. Crosssectional tests suggest that the ETF-related misvaluation is stronger for stocks with: a less competitive equity market (i.e., with prices more sensitive to demand shocks), lower ownership by active investors, and more costly arbitrage constraints. Finally, I find that high-flow firms exhibit behavior typically associated with perceived overvaluation (e.g., more secondary equity offerings).  For their guidance and support, I especially thank the members of my dissertation committee: Stephen Penman (chair), Fabrizio Ferri, Lawrence Glosten, Jonathan Glover, and Shiva Rajgopal. I thank Sudipta Basu, Thomas Bourveau, Robert Bushman, Matthias Breuer, Wei Cai, Kent Daniel, Richard Frankel, Pingyang Gao, Trevor Harris, Rachel Hayes, Alon Kalay, Jinhwan Kim, David Kwon, Alvis Lo, Doron Nissim, Ethan Rouen, Robert Stoumbos, Hao Xue, Wenhao Yang, Frank Yu, Ronghuo Zheng, Christina Zhu, workshop participants at Columbia, the CMU Emerging Scholar Session, and the SEC Doctoral Symposium for helpful comments. I also thank Bruiser Liu from PhaseCapital, Alex Schiller from the SEC, and multiple investment professionals for providing institutional insights. This project has also benefited from discussions with my fellow students Serene Huang, Yiran Kang, Venkat Peddireddy, and Kunjue Wang. I thank Martijn Cremers for making active shares data available. I am also thankful for the financial support from the Columbia Accounting Alumni Award, the W. Edwards Deming Center, and the Duncan Merriwether Doctoral Fellowship. All errors are my own.

We investigate how the prevalence of materialistic bank CEOs has evolved over time, and how risk management policies, non-CEO executives’ behavior and tail risk vary with CEO materialism. We document that the proportion of banks run by materialistic CEOs increased significantly from 1994 to 2004, that the strength of risk management functions is significantly lower for banks with materialistic CEOs, and that non-CEO executives in banks with materialistic CEOs insider trade more aggressively around government intervention during the financial crisis. Finally, we find that banks with materialistic CEOs have significantly more downside tail risk relative to banks with non-materialistic CEOs.

We investigate whether a borrower’s media coverage influences the syndicated loan origination and participation decisions of informationally disadvantaged lenders, loan syndicate structures and interest spreads. In syndicated loan deals, information asymmetries can exist between lenders that have a relationship with a borrower and less informed, non-relationship lenders competing to serve as lead arranger on a syndicated loan, and also between lead arrangers and less informed syndicate participants. Theory suggests that the aggressiveness with which less informed lenders compete for a loan deal increases in the sentiment of public information signals about a borrower. We extend this theory to syndicated loans and hypothesize that the likelihood of less informed lenders serving as the lead arranger or joining a loan syndicate is increasing in the sentiment of media-initiated, borrower-specific articles published prior to loan origination. We find that as media sentiment increases (1) outside, non-relationship lenders have a higher probability of originating loans; (2) syndicate participants are less likely to have a previous relationship with the borrower or lead bank; (3) lead banks retain a lower percentage of loans and (4) loan spreads decrease.

We measure a bank’s connectedness by constructing a measure of its text similarity with other banks based on 10-K business description and MD&A discussions. We find that tail-risk comovement between a given bank and the banking system is increasing in the bank’s average similarity. We also construct groups of connected peer banks, finding that banks co-move significantly more in the tails with their highest similarity peers. Finally, we separate 10-K text into boilerplate and non-boilerplate components. We find that both boilerplate and non-boilerplate similarity have incremental information about future tail comovement. However, non-boilerplate similarity is significantly timelier than boilerplate, consistent with non-boilerplate similarity capturing commonalities across banks in currently evolving fundamentals and boilerplate similarity capturing commonalities in structural features that evolve slowly over time.