Conditional Conservatism and Labor Investment Efficiency

Prior literature documents that asymmetric timely recognition of losses versus gains (also known as conditional conservatism) can induce management to make more efficient investment decisions by mitigating information asymmetry between management and investors and providing early signals about the profitability of projects undertaken. In this paper, we investigate the impact of conservatism on an important investment decision that has been overlooked, namely investment in labor. We find that conservatism is negatively associated with labor investment inefficiency; more specifically, conservatism reduces inefficiency investment practices on the labor market, including over-hiring, under-firing, under-hiring, and over-firing. Our results hold after controlling for managerial ability, corporate governance and other investments

Corporate Leverage and Currency Crises

This paper provides an explanation of currency crises based on an argument that bailing out financially distressed exporting firms through a currency depreciation is ex-post optimal. Exporting firms have profitable investment opportunities, but they will not invest because high leverage causes debt overhang problems. The government can make investments feasible by not defending an exchange rate and letting the currency depreciate. Currency depreciation always increases the profitability of new investments when revenues from that project are in foreign currency and costs denominated in the domestic currency are nominally rigid. Although currency depreciation is always ex-post optimal once risky projects have been taken and failed, it can be harmful ex-ante, because it leads to excessive investment in risky projects even if more valuable safe projects are available. However, currency depreciation is also ex-ante optimal if risky projects have a higher expected return than safe proj..