The views on financial liberalization are quite conflictive. Many argue that it triggers financial bubbles and crises. Others claim that financial liberalization allows markets to function properly and capital to move to its most profitable destination. The empirical evidence on these effects is not robust. This paper constructs a new comprehensive chronology of financial liberalization and shows that a key reason for the inconclusive evidence is that the effects of liberalization are time-varying. Financial liberalization is followed by large booms and busts only in the short run. In the long run institutions improve and financial markets tend to stabilize.

Extant research posits that cross-listing improves firms' access to lower cost external financing. But so far, there is scarce evidence that improved access to external funds through cross-listing contributes to higher firm growth. Documenting the relation between firm growth and cross-listing is critical because the presumption in prior research is that funds raised via cross-listing will be channeled towards potentially profitable projects. Using a sample of firms from thirty-seven countries that are cross-listed in the USA, we find a positive association between cross-listing and subsequent externally financed firm growth rates. However, we do not find that increases in externally financed firm growth after cross-listing vary systematically as a function of the home-country attributes of the cross-listed firms. Overall, our results provide new and direct evidence on the impact of cross-listing on the firm growth rates.

We study the effects of a market-wide short-sale constraint in a dynamic economy with heterogeneous beliefs. Imposing the constraint reduces the stock price if the optimistic investors' intertemporal elasticity of substitution (IES) is less than one and increases the stock price if the optimist's IES is greater than one. In calibrated examples, the optimist's market price of risk falls and the interest rate rises when the constraint binds. Imposing the constraint leads to a higher stock volatility if the optimist's IES is less than one and a lower stock volatility if the IES is greater than one.

I study the determinants of changes in credit spreads for U.S. dollar denominated domestic and foreign sovereign bonds using fundamentals specified by structural models to separate spreads into their credit and non-credit components. I find that the non-default portions of spreads have a component that is common for each type of debt. Further, using a vector autoregressive model, I find that domestic spreads are related to the lagged component of sovereign spreads. I also find that some proxies for liquidity are related to the common components, suggesting a liquidity-based explanation for the common component not identified by previous research.

Large U.S. banks dramatically increased their capitalization during the 1990s, to the highest levels in more than 50 years. We document this buildup of capital and evaluate several potential motivations. Our results support the hypothesis that regulatory innovations in the early 1990s weakened conjectural government guarantees and enhanced bank counterparties' incentives to monitor and price default risk. We find no evidence that a bank holding company's (BHC's) market capitalization increases with its asset volatility prior to 1994. Thereafter, the data display a strong cross-sectional relation between capitalization and asset risk.

The theoretical literature on security-voting structure can be organized around three questions: What impact do nonvoting shares have on takeover outcomes? How does disproportional voting power affect the incentives of blockholders? What are the repercussions of mandating one share - one vote for firms' financing and ownership choices? Overall, the costs and benefits of separating cash flow and votes reflect the fundamental governance trade off between disempowering blockholders and empowering managers. It is therefore an open question whether mandating one share - one vote would improve the quality of corporate governance, notably in systems that so far relied on active owners.

We survey the empirical literature on disproportional ownership, i.e. the use of mechanisms that separate voting rights from cash flow rights in corporations. Our focus is mostly on explicit mechanisms that allow some shareholders to acquire control with less than proportional economic interest in the firm (dual-class equity structures, stock pyramids, cross-ownership, etc.), but we also briefly discuss other mechanisms, such as takeover defenses and fiduciary voting. We provide a broad overview of different areas in this literature and highlight problems of interpretation that may arise because of empirical difficulties. We outline potentially promising areas for future research.

We model and experimentally examine the board structure–performance relationship. We examine single-tiered boards, two-tiered boards, insider-controlled boards, and outsider-controlled boards. We find that even insider-controlled boards frequently adopt institutionally preferred rather than self-interested policies. Two-tiered boards adopt institutionally preferred policies more frequently but tend to destroy value by being too conservative, frequently rejecting good projects. Outsider-controlled single-tiered boards, both when they have multiple insiders and only a single insider, adopt institutionally preferred policies most frequently. In those board designs where the efficient Nash equilibrium produces strictly higher payoffs to all agents than the coalition-proof equilibria, agents tend to select the efficient Nash equilibria.

The paper examines the impact of executive compensation on private securities litigation. We find that incentive pay in the form of options increases the probability of securities class action litigation, holding constant a wide range of firm characteristics. We further document that there is abnormal upward earnings manipulation during litigation class periods and that insiders exercise more options and sell more shares during class periods, but that this activity is largely driven by pre-existing option holdings of the managers. Our results suggest that option-based compensation may have the unintended side effect of giving executives an incentive to focus excessively on the short term share price.

Entrepreneurial finance literature has highlighted that institutional investors are the main contributors to private equity funds. This paper complements these findings by documenting that institutional investors also invest directly in private equity. A major concern for such investments is the higher agency costs associated with private equity. We show that institutions invest in private firms with governance mechanisms that tend to reduce the expected agency costs and risk of minority expropriation. Good governance mechanisms further allow institutional investors to enjoy the benefits of syndication and thereby reduce idiosyncratic risk. In addition, we show that institutional investments tend to be followed by further improvements in corporate governance and tend to occur in high-growth firms within research and development intensive industries.

This paper examines the expropriation of a foreign investor by a local partner and the subsequent resolution of the case through international arbitration in favor of the investor. Despite the investor's 99% interest in the joint venture, the local partner managed to divert the entire value of the underlying entity for his personal benefit. This clinical examination of an expropriation and its aftermath illustrates the interaction of property and contract rights in a global setting, how corporate control is shaped by geography, and how multinational firms may be advantaged by availing themselves of stronger investor protections than local firms.

We empirically study the economic benefits of giving investors access to index options in the standard portfolio problem, analyzing both expected-utility and nonexpected-utility investors in order to understand who optimally buys and sells options. Using data on S&P 500 index options, CRRA investors find it always optimal to short out-of-the-money puts and at-the-money straddles. The option positions are economically and statistically significant and robust to corrections for transaction costs, margin requirements, and Peso problems. Loss-averse and disappointment-averse investors also optimally hold short option positions. Only with highly distorted probability assessments can we obtain positive portfolio weights for puts (cumulative prospect theory and anticipated utility) and straddles (anticipated utility).

A wide range of empirical biases hampers hedge fund databases. In this paper we focus upon survival-related biases and disentangle look-ahead biases due to self-selection of funds and due to fund termination. Self-selection arises because funds voluntarily report their information to data vendors and may decide to stop doing so. By extending existing methodology, we analyze persistence in hedge fund performance over the period 1994–2000, taking into account the above biases. The results show that look-ahead biases due to liquidation and self-selection enforce each other and may lead to overestimating expected returns by as much as 8% per year. Overall, the results are consistent with positive persistence in hedge fund returns at horizons of two and four quarters.

Despite the wide acceptance of return-based style analysis, the method has several limitations. One important drawback is the assumption that style exposures are time-invariant. We apply results on break tests developed in Bai and Perron (1998, 2003) to test for style breaks. We find strong evidence against the hypothesis of constant time exposures in daily return data for European equity funds. All funds exhibit at least one break, and 60% exhibit more than one break. We show that the main reason for style breaks is the mutual funds' reliance on conditional investment strategies based on public information and volatility estimates.

This paper investigates why traders hide their orders and how other traders respond to hidden depth. Using a logit model, we provide empirical findings suggesting that traders use hidden orders to manage both exposure risk and picking off risk. Using probit models, we show that hidden depth increases order aggressiveness. Our interpretation of this empirical evidence is threefold. First, hidden depth detection is possible and frequent. Second, when traders detecthidden volume at the best opposite uote, they strategically adjust their order submission to seize the opportunity for depth improvement. Third, traders' response when hidden depth is detected suggests either that they do not associate hidden orders with informed trading or that the risk of trading with an informed trader is widely offset by the opportunity for depth improvement.

Why is the issuer's reservation price not disclosed in bookbuilding? We analyze the differential effect of reservation price disclosure on the underpricing required to elicit truthful indications of interest from investors. We find that a policy of disclosure would increase proceeds for firms with a reservation price sufficiently high relative to possible investor valuations of the shares, but would decrease proceeds for issuers with lower reservation prices. The former group is likely to be absent from the IPO market, explaining why secrecy in reservation prices is the norm.