The effect of the run-up in the stock market on labor supply

This article presents estimates of the effect of the run-up in the stock market on labor supply. The authors find that, in the absence of a run-up in the stock market, aggregate labor force participation rates would have been about 1 percent higher than they are today.Labor supply ; Stock market

The Hazards of Debt: Rollover Freezes, Incentives, and Bailouts

We investigate the trade-off between incentive provision and inefficient rollover freezes for a firm financed with short-term debt. First, debt maturity that is too short-term is inefficient, even with incentive provision. The optimal maturity is an interior solution that avoids excessive rollover risk while providing sufficient incentives for the manager to avoid risk-shifting when the firm is in good health. Second, allowing the manager to risk-shift during a freeze actually increases creditor confidence. Debt policy should not prevent the manager from holding what may appear to be otherwise low-mean strategies that have option value during a freeze. Third, a limited but not perfectly reliable form of emergency financing during a freeze—a “bailout”—may improve the terms of the trade-off and increase total ex ante value by instilling confidence in the creditor markets. Our conclusions highlight the endogenous interaction between risk from the asset and liability sides of the balance sheet

Why Do Hedgers Trade So Much?

Futures positions of commercial hedgers in wheat, corn, soybeans and cotton fluctuate much more than expected output. Hedgers\u27 short positions are positively correlated with price changes. Together, these observations raise doubt about the common practice of categorically classifying trading by hedgers as hedging while trading by speculators as speculation, as hedgers frequently change their futures positions over time for reasons unrelated to output fluctuations, arguably a form of speculation

Wall Street and the Housing Bubble

We analyze whether mid-level managers in securitized finance were aware of a large-scale housing bubble and a looming crisis in 2004-2006 using their personal home transaction data. We find that the average person in our sample neither timed the market nor were cautious in their home transactions, and did not exhibit awareness of problems in overall housing markets. Certain groups of securitization agents were particularly aggressive in increasing their exposure to housing during this period, suggesting the need to expand the incentives-based view of the crisis to incorporate a role for beliefs

Yesterday's Heroes: Compensation and Creative Risk-Taking

We study the relationship between compensation and risk-taking among finance firms using a neglected insight from principal-agent contracting with hidden action and risk-averse agents. If the sensitivity of pay to stock price or slope does not vary with stock price volatility, then total compensation has to increase with firm risk to satisfy as agent's individual rationality constraint. Consistent with this hypothesis, we find a correlation between total executive compensation, controlling for firm size, and risk measures such as firm beta, return volatility, and exposure to the ABX sub-prime index. There is no relationship between insider ownership, a proxy for slope, and these measures. Compensation and firm risk are not related to governance variables. They increasewith institutional investor ownership, which suggests that heterogeneous investors incentivize firms to take varying levels of risks. Our results hold for non-finance firms and point to newprincipal-agent contracting empirics.

Why Do Hedgers Trade So Much?

Futures positions of commercial hedgers in wheat, corn, soybeans, and cotton fluctuate much more than expected output. Hedgers’ short positions are positively correlated with price changes. Together, these observations raise doubt about the common practice of categorically classifying trading by hedgers as hedging while classifying trading by speculators as speculation, as hedgers frequently change their futures positions over time for reasons unrelated to output fluctuations, which is arguably a form of speculation

Why Do Hedgers Trade So Much?

Futures positions of commercial hedgers in wheat, corn, soybeans, and cotton fluctuate much more than expected output. Hedgers’ short positions are positively correlated with price changes. Together, these observations raise doubt about the common practice of categorically classifying trading by hedgers as hedging while classifying trading by speculators as speculation, as hedgers frequently change their futures positions over time for reasons unrelated to output fluctuations, which is arguably a form of speculation