A firm which produces a single product, whose production cost is a linear function of the production level and where net price per unit is constant, has a Pre-Tax Earnings function which is a linear function of the production level (see Figure I).

We find the financial condition of states impacts bank credit supply through their municipal bond holdings. In particular, we treat sudden political and statutory actions during the 2011 union bargaining rights debates in Wisconsin and Ohio as exogenous shocks to state solvency. We show bank valuations and municipal bond spreads adjust to the announcements, and, over longer horizons, a new lending channel linked to state solvency emerges, whereby banks supply credit as municipal bond appreciations free up capital.

We trace a corporate governance channel of bank shock transmission into the real economy. Using 1,245 U.S. bank enforcement actions (EAs) issued between 1990 and 2017, we show that when a nonfinancial firm (NFF) and bank share a common director, NFF stock prices fall around bank EAs. Severe EAs elicit more negative returns. During enforcement, valued directors substitute NFF board meeting attendance with bank board meeting attendance. Impaired credit relationships, director reputational damage, and endogenous director selection cannot fully explain our results. These findings imply that shared directors could transmit larger bank shocks into the real economy.

We exploit the information content of option prices to construct a novel measure of bank tail risk. We document a persistent increase in tail risk for the U.S. banking industry following the global financial crisis, except for banks designated as systemically important by the Dodd–Frank Act. We show that this post-crisis difference in tail risk for large and small banks is consistent with the too-big-to-fail (TBTF) status of large banks being reinforced by the Dodd–Frank designation: Naming the banks whose failure could threaten the financial stability of the U.S. gave investors a list of banks the government deemed as TBTF.

How should the lender of last resort provide liquidity to banks during periods of financial distress? During the 2008–2010 crisis, banks avoided borrowing from the Fed’s long-standing discount window but actively participated in its special monetary program, the Term Auction Facility, although both programs had the same borrowing requirements. Using an adverse selection model with endogenous borrowing decisions, we explain why the two programs suffer from different stigma costs and how the introduction of TAF incentivized banks’ borrowing. We discuss the empirical relevance of the model’s predictions.

We examine liquidity-related characteristics of U.S. firms with cross-listed shares in 20 foreign markets in the 1950–2013 period. We find that firms after foreign-market listing exhibit lower liquidity sensitivity and lower liquidity beta and suffer less from transitory price shocks. These results are stronger when firms are listed on multiple exchanges and in larger and more liquid markets. The liquidity enhancement is associated with firms’ increased foreign ownership postlisting and is effective for firms with high levels of volatility, foreign income, and foreign trading and a high probability of informed trading. Our findings provide support for global markets providing liquidity and reducing liquidity risk to U.S. firms.

We exploit the arrival of industry-wide synergistic merger waves to identify whether classified boards deter takeover bids. In a stylized model, we show that when target classified boards are costly to bidders, their negative effect on takeover likelihood should be more pronounced during merger waves. Using a sample of takeover bids in the United States between 1990 and 2016, we find strong evidence supporting this prediction. The results are robust to accounting for the benefits of classified boards and controlling for other antitakeover provisions. Our findings suggest that classified boards effectively reduce a firm’s exposure to the takeover market.

We solve a flexible model that captures transactions costs and infrequencies of trading opportunities for illiquid assets to better understand the shadow costs of illiquidity for different origins of asset illiquidity and heterogeneous investor types. We show that illiquidity that results in suboptimal asset allocation carries low shadow costs, whereas these costs are high when illiquidity restricts consumption. As a result, the shadow costs are high for short-term investors, investors who face substantial liquidity shocks, and investors who desire to allocate a large fraction of their wealth to illiquid assets.