We introduce and test a firm-level innovation-efficiency measure new to the finance literature. The measure, termed the research quotient (RQ), defined as the firm-specific output elasticity of research and development (R&D), was first developed in the management literature. RQ has a low correlation with existing innovation input, output, and efficiency measures. We test RQ in a number of innovation tests common to the finance literature and find that RQ is robust in all tests of firm value, even after controlling for previous innovation measures. The results suggest that RQ may serve as a relevant complementary measure of a company’s innovation.

We examine the effect of labor mobility on venture capital (VC) investment. Following the staggered adoption of the inevitable disclosure doctrine that restricts labor mobility, VCs are less likely to invest in affected states. This effect is more pronounced when human capital is more important to startups, when VC investment is more uncertain, and when VCs’ monitoring costs are higher. The reduced innovation productivity of employees is a plausible underlying mechanism. To mitigate this adverse effect, VCs stage finance startups more and syndicate more with other VCs. Our paper sheds new light on the real effects of labor market frictions.

We investigate how ownership structure influences operating performance and implied agency costs. Our sample includes over 42,000 U.K. private and public firms. We document several new results of considerable economic significance relating to i) horizontal agency costs arising from unequal ownership within private firms, ii) amplification of agency costs from joint presence within the same firm of horizontal agency problems and vertical agency problems arising from separation of ownership and control, iii) mitigation in agency costs wrought by a second large shareholder, iv) impact of complex ownership structures, and v) agency cost differences between public firms and comparable private firms.

Using microlevel panel data and a difference-in-differences identification strategy, we study the effect of political uncertainty on household stock market participation. We find that households significantly reduce their participation and reallocate funds to safer assets during periods of increased political uncertainty prior to gubernatorial elections. The decline in participation is related to households’ response to elevated asset risk and their incentive to hedge increased labor income risk. In situations where uncertainty remains high after elections, pre-election reduction in participation is only partially reversed.

An important piece of the capital structure puzzle has been missing, and it is not a contracting friction. It is recognition that managers do not have sufficient knowledge to optimize capital structure with any real precision. The literature critique in this paper i) identifies the conceptual sources of the main empirical failures of the leading models of capital structure and ii) shows how those failures can be repaired by taking into account imperfect managerial knowledge and several other factors. The analysis yields a compact set of principles for thinking about capital structure in an empirically supported way.

Value and momentum returns and combinations of them across both countries and asset classes are explained by their loadings on global macroeconomic risk factors. These loadings describe why value and momentum have positive return premia, although being negatively correlated. The global macroeconomic risk factors also perform well in capturing the returns on other characteristic-based portfolios. The findings identify a global macroeconomic source of the common variation in returns across countries and asset classes.

We provide evidence regarding mutual funds’ motivation to hold lottery stocks. Funds with higher managerial ownership invest less in lottery stocks, suggesting that managers themselves do not prefer such stocks. The evidence instead supports that managers cater to fund investors’ preference for such stocks. In particular, funds with more lottery holdings attract larger flows after portfolio disclosure compared with their peers, and poorly performing funds tend to engage in risk shifting by increasing their lottery holdings toward year-ends. Funds’ aggregate holdings of lottery stocks contribute to their overpricing.

I exploit the leveraged exchange-traded funds’ (ETFs’) primary market to measure aggregate, uninformed, gambling-like demand, that is, speculation sentiment. The leveraged ETFs’ primary market is a novel setting that provides observable arbitrage activity attributed to correcting mispricing between ETFs’ shares and their underlying assets. The arbitrage activity proxies for the magnitude and direction of speculative demand shocks and I use them to form the Speculation Sentiment Index. The measure negatively relates to contemporaneous market returns (e.g., it is bullish in down markets) and negatively predicts returns. The results are consistent with speculation sentiment causing market-wide price distortions that later reverse.

We use new hand-collected data from corporate filings to study the drivers of corporate capital structure adjustment. Classifying firms by their adjustment frequencies, we reveal previously unknown patterns in their reasons for financing and the financial instruments used. Some are consistent with existing theory, whereas others are understudied. Many leverage changes are outside of the firm’s control (e.g., executive option exercise) or incur negligible adjustment costs (e.g., credit-line usage). This implies a lower frequency of proactive leverage adjustments than indicated by prior research using accounting data, suggesting that costs of adjustment are higher, or the benefits lower, than previously thought.

Firms with high levels of organization capital (OK), a firm-specific production factor provided by key employees, are known to be risky and earn high stock returns. We argue that fragility of OK (i.e., its sensitivity to potential disruptions) is an independently important dimension of this risk. We proxy for fragility by the size of the top management team and show that firms with small teams outperform firms with big teams by 5% annually. The return spread increases in the level of OK and correlates with the outside options of top executives. Further supporting our interpretation, shocks to team composition from unexpected deaths of chief executive officers cause larger value losses in smaller teams.

We find that an increase in a firm’s incentives to use trade secrets to protect its intellectual property results in a more actively managed capital structure. Exploiting U.S. states’ adoption of the Uniform Trade Secrets Act as a positive “shock” in the protection afforded to trade secrets, we find that firms covered by the Act reduce debt levels while increasing investments in intangibles. Additional tests suggest that firms fund these financing and investment activities by issuing more equity. Consistent with an increase in overall intangibility magnifying contracting problems with creditors, we find that covered firms experience higher costs of debt.

The personal traits of chief executive officers (CEOs) have been found to influence corporate policy decisions. We examine the impact of CEO past corporate distress experiences on payout policy. CEOs who have experienced a distress event in their career, while working in a non-CEO position at a different firm, subsequently alter corporate payout policy once in the CEO position. They are less likely to pay dividends and repurchase shares, pay out lower levels of dividends, and are less likely to increase dividends. They further exhibit preference toward repurchases. Overall, we report that experience-driven conservatism affects payout policy, a novel finding in the literature.

Hedge fund activists transfer relevant prior work experience to their activism campaigns. Categorizing activists based on past employment at investment banks (generalists), private equity or special situations partnerships (specialists), or other firms (nonfinancial experts), we relate activists’ prior work experience to their choices and outcomes. Both generalists with codifiable skills and specialists with tacit skills contribute to successful outcomes, but differences in these skills lead to differences in activism processes. Activist choices, market responses, target firm responses, and procedural aspects of activism vary with activist identity. Our analysis examines activists’ heterogeneous skills and highlights their importance in shaping activist interventions.

I construct a new proxy for Tobin’s Q that incorporates the replacement cost of patent capital. This proxy, which I call patent Q, explains up to 62% more variation in investment than other proxies for Q. Furthermore, investment is more sensitive to patent Q than to other proxies for Q. Although investment is predicted more accurately by, and is more sensitive to, patent Q, controlling for patent Q leads to relatively larger, not smaller, cash flow coefficients. All results are stronger in subsamples with more patent capital. Overall, patent Q strengthens the historically weak investment–Q relation.

Material private information transmits through social networks. Using manually collected information on networks of alumni reunion cohorts, we show that hedge fund managers connected to directors of firms engaged in merger deals increase call-option holdings on target firms before deal announcements. Effects are larger when reunion events for connected cohorts occur just before announcements. Independent directors, directors with short tenure, and directors with low stock ownership are more likely to transmit information. Our results are robust to confounding factors and alternative specifications. These findings highlight the role of social networks as channels of private-information dissemination.

We propose an investor attention index based on proxies in the literature and find that it predicts the stock market risk premium significantly, both in sample and out of sample, whereas every proxy individually has little predictive power. The index is extracted using partial least squares, but the results are similar by the scaled principal component analysis. Moreover, the index can deliver sizable economic gains for mean-variance investors in asset allocation. The predictive power of the investor attention index stems primarily from the reversal of temporary price pressure and from the stronger forecasting ability for high-variance stocks.

Prior research documents that asset growth is negatively associated with future firm performance. In contrast, we show that growth financed by product market stakeholders (i.e., “operating growth”) is positively associated with future firm performance. Investors and security analysts underestimate the positive effects of operating growth on future performance, resulting in return predictability and overly pessimistic earnings forecasts for firms with high operating growth. Future stock returns largely concentrate around subsequent earnings announcements with declining magnitudes, consistent with the error-in-expectation explanation. Results from cross-sectional tests further support the hypothesis that operating growth signals high future performance but investors underreact to it.

We find that defined benefit employee pension plans of firms that are targets of hedge fund activism experience underfunding and their defined contribution plans experience reductions in employer contributions. Pension underfunding occurs due to reduced employer contributions to the plans, which target firms justify by increasing the assumed rates of returns on plan investments and the discount rate used to compute the present value of plan obligations. Despite tilting plan investments toward riskier assets, pension fund performance does not improve after activists target a firm. Our evidence suggests that shareholder wealth gains from activism are partly wealth transfers from employees.

Several theoretical studies suggest that coordination problems can cause arbitrageur crowding to push asset prices beyond fundamental value as investors feedback trade on each others’ demands. Using this logic, we develop a crowding model for momentum returns that predicts tail risk when arbitrageurs ignore feedback effects. However, crowding does not generate tail risk when arbitrageurs rationally condition on feedback. Consistent with rational demands, our empirical analysis generally finds a negative relation between crowding proxies constructed from institutional holdings and expected crash risk. Thus our analysis casts both theoretical and empirical doubt on crowding as a stand-alone source of tail risk.

An abundance of evidence relates facial width-to-height ratio (fWHR) to masculine behaviors in males. We show that hedge funds operated by high-fWHR managers underperform those operated by low-fWHR managers, bear greater downside risk, are more susceptible to fire sales, and fail more often. High-fWHR managers compensate for their underperformance by marketing their funds more aggressively, thereby garnering higher flows and fee revenues. By exploiting major personal events that shape testosterone, namely marriage and fatherhood, we trace the biological mechanism underlying the relation between fWHR and investment performance to circulating testosterone. Our findings are robust and extend to equity mutual funds.