We analyze how contractibility affects contract design. A major concern when designing research agreements is that researchers may use their funding to subsidize other projects. We show that, when research activities are not contractible, an option contract is optimal. The financing firm obtains the option to terminate the agreement and, in case of termination, broad property rights. The threat of termination deters researchers from cross-subsidization, and the cost of exercising the termination option deters the financing firm from opportunistic termination. We test this prediction using 580 biotechnology research agreements. Contracts with termination options are more common when research is non-contractible.

This dissertation consists of three chapters, each of them analyzing different important managerial choices: payout policies, financing decisions and acquisitions.

The first chapter argues that workers’ unemployment risk may induce firms to adopt conservative payout policies. I show that firms increase their dividend payout following sharp increases in unemployment insurance generosity, a policy effective in reducing human costs due to layoffs. By focusing on policy changes plausibly unrelated to macroeconomic conditions, I show that firms increase payout by about 6% in presence of stronger protection for unemployed workers. Consistent with public insurance crowding out private insurance by firms, I find that this effect is driven by firms with worse growth prospects, high labor intensity, and in more volatile industries. Overall, this evidence suggests that labor market considerations play an important role in shaping firms’ payout decisions.

The second chapter, co-authored with Ulrike Malmendier and Hui Zheng, focuses on financing choices made by potentially biased managers. Analyzing the traits and biases of individual man- agers, such as CEOs, in isolation can result in the misattribution of corporate outcomes, especially under assortative matching. We illustrate this insight for the role of CEO and CFO overconfidence in financing decisions. We show that the CFO’s rather than the CEO’s type dominates in determining the choice of external financing when we consider their beliefs jointly. At the same time, overconfident CEOs (and not CFOs) obtain significantly better financing conditions, as predicted by our theoretical model. Moreover, overconfident CEOs tend to hire overconfident CFOs whenever given the opportunity, generating a multiplier effect.

The third chapter analyzes the ex-post ouctomes of acquisitions presenting different degrees of synergies between acquirors and targets. Theoretical and empirical work suggests that mergers involving vertically integrated firms are more likely to produce gains in productivity. I show that the post-merger change in productivity is positively related to the degree of relatedness between acquirors and targets. On the other hand, firms acquiring unrelated targets display a drop in stock and cash flow volatility, suggesting that such acquisitions are motivated by managers willing to “enjoy the quiet life.” Yet this information is not apparent to investors at announcement and only becomes available slowly. Notably, acquirors of unrelated targets significantly underperform acquirors of related targets in the 18 months following a merger announcement. These results suggest that the announcement returns may be a poor proxy for the “diversification discount,” and that investors may be unable to realize how different industries exhibit different degrees of connection.

This dissertation contains two chapters. In Chapter 1, I combine randomized controlled trials with transaction-level data and survey data, I show that credit-limit extensions significantly increase consumer expectations about their future income without increasing realized income. A one-dollar higher qualified credit limit raises consumer income expectations over the nextsix months by 40 cents and total consumption by 34 cents. The expectation changes explain around 35% of the total spending responses to credit limit extensions. The results show that consumers infer information about their future income from credit supply, and this learning behavior impacts their economic decision-making greatly.

In the second chapter, I structurally estimate a life-cycle model incorporating the income-inference channel to study how shocks to banks’ beliefs affect their credit extensions and consumers’ subsequent spending behaviors. I find that, When the precision of bank signal about consumer future income increases by 25%, equilibrium credit supply and spending for the median consumer respectively increase by 14.11% and 4.11%. As suggested by the counter-factual analysis, when the advancement of information technology enables banks to extract more precise signals about household future income, credit supply, and spending tend to increase. The elasticity of spending with respect to bank-signal precision is around 0.16.

This dissertation consists of three essays in the areas of corporate finance and behavioral corporate finance, with a particular focus on chief executive officers (CEOs).Chapter 1 studies the effect of sunk costs on corporate investment. Sunk costs are unrecoverable costs that should not affect decision-making. I provide evidence that firms systematically fail to ignore sunk costs and that this leads to significant investment distortions. In fixed-exchange-ratio stock mergers, aggregate market fluctuations after parties enter into a binding merger agreement induce plausibly exogenous variation in the final acquisition cost. These quasi-random cost shocks strongly predict firms' commitment to an acquired business following deal completion, with an interquartile cost increase reducing subsequent divestiture rates by 8-9%. Consistent with an intrapersonal sunk cost channel, distortions are concentrated in firm-years in which the acquiring CEO is still in office. Chapter 2, coauthored with Mark Borgschulte, Canyao Liu, and Ulrike Malmendier, estimates the long-term effects of experiencing high levels of job demands on the mortality and aging of CEOs. The estimation exploits variation in takeover protection and industry crises. First, using hand-collected data on the dates of birth and death for 1,605 CEOs of large, publicly-listed U.S. firms, we estimate the resulting changes in mortality. The hazard estimates indicate that CEOs' lifespan increases by two years when insulated from market discipline via anti-takeover laws, and decreases by 1.5 years in response to an industry-wide downturn. Second, we apply neural-network based machine-learning techniques to assess visible signs of aging in pictures of CEOs. We estimate that exposure to a distress shock during the Great Recession increases CEOs' apparent age by one year over the next decade. Our findings imply significant health costs of managerial stress, also relative to known health risks. At the same time, we find no evidence of a compensating differential in the form of lower pay for CEOs who serve under less demanding conditions, which may indicate that not all parties fully account for the health implications of job demands. Chapter 3, coauthored with Ulrike Malmendier and published in the Oxford Research Encyclopedia of Economics and Finance in September 2020, takes a broader perspective, and reviews and analyzes the growing body of finance research studying managerial biases and their implications for firm outcomes. Since the mid-2000s, this strand of behavioral corporate finance has provided theoretical and empirical evidence on the influence of biases in the corporate realm, such as overconfidence, experience effects, and the sunk-cost fallacy. The field has been a leading force in dismantling the argument that traditional economic mechanisms--selection, learning, and market discipline--would suffice to uphold the rational-manager paradigm. Instead, the evidence reveals that behavioral forces exert a significant influence at every stage of a CEO's career. First, at the appointment stage, selection does not impede the promotion of behavioral managers. Instead, competitive environments oftentimes promote their advancement, even under value-maximizing selection mechanisms. Second, while at the helm of the company, learning opportunities are limited, since many managerial decisions occur at low frequency, and their causal effects are clouded by self-attribution bias and difficult to disentangle from those of concurrent events. Third, at the dismissal stage, market discipline does not ensure the firing of biased decision-makers as board members themselves are subject to biases in their evaluation of CEOs. By documenting how biases affect even the most educated and influential decision-makers, such as CEOs, the field has generated important insights into the hard-wiring of biases. Biases do not simply stem from a lack of education, nor are they restricted to low-ability agents. Instead, biases are significant elements of human decision-making at the highest levels of organizations. An important question for future research is how to limit, in each CEO career phase, the adverse effects of managerial biases. Potential approaches include refining selection mechanisms, designing and implementing corporate repairs, and reshaping corporate governance to account not only for incentive misalignments but also for biased decision-making.

This dissertation seeks to understand what components of household finance are important to consumers. In the first two chapters, we study a natural experiment in Chile where the government introduced legislation to increase financial transparency. In particular, the legislation required banks to include fees in the interest rate and later to provide a standardized presentation of their loan terms. Using administrative data on the universe of consumer loans in Chile, we use a regression discontinuity design to estimate the effect of this transparency reform on loan interest rates. We find that consumers are 50% less likely to default and 100% less likely to be delinquent on their loans. Further, we find that less sophisticated consumers benefited more from transparency legislation that communicated less information than legislation that presented more comprehensive information about their loans. We expand these findings and develop a dynamic structural model in order to explore the link between reduced informational frictions, price-sensitivity in consumer decisions, and welfare in long-term market equilibrium. We find that, after the policy, information frictions fell around 10 percent, which translated into an interest reduction of 180 basis points. We estimate a welfare improvement for consumers of 15 percent in the long run. The last chapter uses tuition freezes on public schools in six states to examine nonprofit universities' tuition reactions to this imposed constraint on their competitor public school. Evidence from both an event study and an instrumental variables approach shows that non-profit universities do not change their prices in response to tuition freezes by comparable public schools. In contrast, for-profit universities decrease their prices by roughly $1,000. This suggests that competition between universities puts downward pressure on prices for for-profit schools but not nonprofit schools. This suggests that an important component of household spending, human capital accumulation, may become increasingly out of reach for households as few determinants cause tuition to go down.

To which extent may history help us understand current financial outcomes? Financial

History typically tests for financial theories using historical data, or studies past financial

outcomes to understand the present through analogy. This dissertation focuses on an alternative approach to the use of history in finance, which I label "History & Finance." This approach exploits facts and institutions of the past, and the persistence of the economic and social phenomena they determine, to directly explain current financial outcomes. In the first chapter of the dissertation, I define the scope of History & Finance based on its differences with Economic and Financial History. History & Finance has its roots in the Political Economy approach that exploits the long-run effects of historical shocks and institutions to understand current economic outcomes. I survey the research in History & Finance, organizing it across the subfields of Finance which have used this approach so far. I discuss the challenges that this method poses to researchers, and in particular the difficulty of making plausible causal statements in long-run settings, and of determining the channels of transmission of the effects of historical phenomena on current financial outcomes. I then propose five directions that scholars may follow to enlarge the scope of this approach to research in finance.

In the second chapter of the dissertation, I use the History & Finance approach to understand the current spatial distribution of innovation. I focus on the innovation of traditional industries, a margin of innovation which is largely neglected in the literature, although it includes the vast majority of the innovations produced every year in Europe and the United States. I exploit newly assembled data on innovation and education at the level of European regions, as well as a unique rm-level data set on the innovation of traditional industries, to show that the amount of formal education of blue-collar workers is an important determinant of the innovation produced in traditional industries. The relevance of the formal education of blue-collar workers for innovation is alternative to the learning-by-doing hypothesis and the directed technical change literature, none of which recognizes a role for formal education in the productivity of jobs on the line. Moreover, I document for the first time that the variation in the amount of basic education across European regions is highly persistent over the decades, despite the major institutional and economic shocks that have differentially affected European regions over time. Hence, I use the historical variation of basic education across regions to address the issue of the reverse causality between current innovation and current basic education. I also propose an historical natural experiment, the quasi-exogenous diffusion of the printing press across Europe after 1450 AD, as a source of variation for cross-regional basic education in the past. Higher basic education increases the amount of innovation produced by firms in traditional industries, whose workers are in large

part basically educated individuals. The effect is indeed stronger for firms that employ more blue-collar workers. I also document that higher basic education determines higher capital expenditures and lower financial constraints for those firms that innovate more.

In the third chapter of the dissertation, which is coauthored with Marcel Prokopczuk and Michael Weber, I use the History & Finance approach to understand the limited stock

market participation of households. Because the Jewish population has been associated with the provision of financial services in Europe for more than eight centuries, we test whether those German counties with a higher persecution of local Jewish communities over time tend to invest less in stocks. Indeed, in those counties where historical persecution was higher as far back as in the Middle Ages, present-day households invest less in stocks. The size of the effect is similar across cohorts, and it does not fade away over time. The evidence is consistent with a cultural norm of distrust in finance that has started in those areas where Jews were persecuted more in the past, and has transmitted across generations over the centuries. To obtain quasi-exogenous variation in the extent of Jewish persecution across German counties in the distant past, we exploit the forced migrations of the first German Jewish communities from the Rhine Valley to current Poland to instrument for the existence of Jewish communities in counties in the Middle Ages, and hence the likelihood that persecution against the communities was documented. This dissertation defines History & Finance as a rising approach to the study of financial phenomena, and it proposes several promising routes that researchers across subfields of finance may take to bring this approach from its infancy to a mature stage.

This dissertation is a collection of three essays in financial economics, specifically focused on the role of information and beliefs in credit markets. The first chapter establishes that private bank information about customers in primary lending markets exists. The second chapter shows that private information hinders banks' capacities to sell loans on secondary markets, unless the purchaser believes that the bank has committed to remain uninformed. The third chapter explores the welfare consequences of incorrect borrower beliefs about the economic environment on financial product choice.

In the first chapter, my co-author and I hypothesize that while lending to a firm, a bank receives signals that allow it to learn and better understand the firm's fundamentals; and that this learning is private; that is, it is information that is not fully reflected in publicly-observable variables. We test this hypothesis using data from the syndicated loan market between 1987 and 2003. We construct a variable that proxies for firm quality and is unobservable by the bank, so it cannot be priced when the firm enters our sample. We show that the loading on this factor in the pricing equation increases with relationship time, hinting that banks are able to learn about firm quality when they are in an established relationship with the firm.

In the second chapter, I present new evidence that lemon problems hinder trade on secondary mortgage markets. Using the geographic distance from lenders to borrowers as a proxy for the absence of private bank information, I document a systematic positive link between distance and the mortgage sale rate. Mortgage sale rates are higher when the originating lender is less likely to be informed about the borrower. I further show that the private mortgage sale rate locally depends on lender-borrower distance only above the conforming loan limit, in the illiquid jumbo market where the GSEs are barred from purchasing mortgages. This is consistent with the familiar tradeoff between market liquidity and seller incentives to acquire information.

In the third chapter, I investigate how borrowers' incorrect beliefs about future inflation might bias their choice between fixed-rate and adjustable-rate mortgages. Borrowers who have experienced recent periods of greater inflation pay more for fixed-rate mortgage contracts and pay more in interest, at least over the first six yeras of the mortgage's life. That is, incorrect beliefs about future inflation are welfare-reducing both ex ante and ex post.

This dissertation explores the extent to which managerial overconfidence affects corporate decisions. This analysis includes three essays, which address a wide range of corporate decisions including financing, investment, acquisition, innovation, liquidity management and advertising decisions.

The first essay introduces a fine-tuned test of the relationship between managerial overconfidence and corporate decisions by taking the chief financial officer (CFO) overconfidence effect into account. Ex-ante, I identify financial policies and non-financial policies such as investment, innovation and acquisition as the primary managerial duties of CFOs and chief executive officers (CEOs) respectively. I construct overconfidence measures for both CEOs and CFOs and test the impact of CEO and CFO overconfidence, both on financial decisions and on nonfinancial decisions. Based on a sample of 1,173 S&P 1500 firms, I find that financial policies are primarily affected by CFO overconfidence while only CEO overconfidence affects nonfinancial decisions. My findings demonstrate that managerial biases affect corporate decisions and managerial duties shape the ways in which top managers influence corporate policies.

The second essay investigates how overconfident CEOs allocate resources toward innovation activities. It argues that overconfident CEOs tend to have greater innovation input. To finance innovation, they save more cash out of the cash flow and spend more on innovation when the cash flow is high. Results from an empirical analysis of 1,015 S&P 1500 firms support this argument. Moreover, based on a series of financial constraint measurements, the effect of CEO overconfidence on liquidity management is found to be more pronounced in financially constrained firms and in highly innovative firms, but not in firms without financial constraints. With regards to innovation performance, overconfident CEOs tend to have more patents, but the overall quality of their patents is not significantly better than that of rational CEOs.

The third essay introduces a simple model of firm advertising behavior in monopolistic competition industries and applies it to the situation of managerial overconfidence. The model shows that the optimal advertising to sales ratio is determined by both firm advertising competency and consumer preference. Overconfident CEOs are more willing to use advertising as a means to convey the quality of their firms and products. Such overestimation of the effects of advertising by overconfident CEOs will result in overspending on advertising. When financially constrained, an overconfident CEO's tendency to overspend will be curbed to some extent, but his amount of advertising will increase with cash flows. An empirical analysis of 654 S&P 1500 firms supports these predictions. The distorted effect of managerial overconfidence is more prominent when firms are financially constrained and when the overconfidence measure is continuous.

This dissertation is comprised of two essays in a topic at the intersection of Financial Economics and Industrial Organization. Both analyze the effect of common ownership in the U.S. corporate loan market. In recent years, firms and banks increasingly have institutional investors as shareholders in common. These shareholders receive profits from the interest rates set by the bank, and they also benefit from the firm's profits. I study how such common ownership affects loans, particularly as measured by size and price.

In my first chapter, I illustrate through a simple model the implications of firm and bank common ownership on loans. I then provide new evidence on the rise and extent of common ownership between firms and banks. I outline three trends in institutional investors' holdings of public companies, and I describe how these trends drive firm and bank common ownership. First, the overall holdings of institutional investors have grown ten-fold in the past 20 years in terms of market value. The average fraction of a public company owned by these investors nearly doubled (to almost 60 percent) over the same time period. The second trend is the increasing fraction of firms and banks that are owned by common owners and also have a loan relationship. The percentage of firm shares held by institutional investors that also hold bank shares at the time of loan origination has doubled to nearly 40 percent between 1990 and 2012. Similarly, the percentage of bank shares held by institutional investors that also hold firm shares doubled to nearly 30 percent over the same time span. Third, I find that common owners are persistent in their holdings. Around 90 percent of investors the drive common ownership between firms and banks remain as investors in the subsequent year, both in terms of the number of investors and in terms of the percentage of shares held by these recurring investors.

In my second chapter, I empirically show that when a firm and a bank have common ownership, the firm obtains larger loans from the bank at a lower interest rate. I use the growth of index funds as a source of exogenous variation to estimate a plausibly causal link between common ownership and loan terms not confounded by unobserved factors such as strategic investments by active institutional investors. I find that a one standard deviation increase in common ownership leads to a five basis point interest rate decrease and a three percent loan size increase. I show that these loan terms do not go to underperforming firms but to firms that are less likely to receive a credit rating downgrade. I also find that this improvement in loan terms is more pronounced for smaller and unrated firms. This suggests that the benefits of common ownership may result from decreased information frictions and decreased monitoring frictions for the lender if the lender's shareholders also have access to firm returns and firm information.

We analyze the impact of winning high-profile tournaments on the subsequent behavior of the tournament winner in the context of chief executive officers of U.S. corporations. We find that the firms of CEOs who achieve ”superstar” status via prestigious nationwide awards from the business press subsequently underperform beyond mean reversion. The underperformance of the company stock holds both relative to the overall market and relative to a sample of ”hypothetical award winners” with matching firm and CEO characteristics. We also find underperformance in accounting returns. At the same time, award-winning CEOs extract significantly higher compensation following the award, both in absolute amounts and relative to other top executives in their firm. They also spend significantly more time and effort on public and private activities outside their company such as assuming board seats or writing books. Our results suggest that media-induced superstar culture leads to behavioral distortions. The distortions are strongest in firms with weak corporate governance, suggesting that firms could prevent the negative consequences.