We highlight an important but overlooked characteristic of financial fragility: “Fragile” stocks command higher liquidity. This reduces their sensitivity to corporate actions with price impact and affects the firms’ incentives to engage in such actions. We show that fragile firms have lower share repurchases, issue more equity, and invest more. We establish causality by relating changes in corporate actions to exogenous changes in fragility induced by mergers of asset managers. Our results suggest that financial fragility has direct but unexpected real implications for corporate actions.

We study the effect of credit default swaps (CDSs) on the bond market. Using a comprehensive sample of U.S. corporate bonds, we document that the presence of CDSs significantly increases bond liquidity and reduces yield spreads for investment grade bonds. We show that CDSs influence the bond market by lowering the impact of fire sales of institutional bondholders and facilitating inventory management for bond dealers who absorb fire sale shocks. However, the liquidity provision role of CDSs gets weakened after the CDS Big Bang in 2009, potentially because of the requirement of large upfront payments.

We hypothesize that social trust, in mitigating contracting incompleteness, may have an important effect on the activeness and effectiveness of delegated portfolio management. Using a complete sample of worldwide open-end mutual funds, we find that trust is positively associated with the activeness of funds and that trust-related active share delivers superior performance (e.g., approximately 2% per year for cross-border investments). Moreover, “trust in the market” and “trust in managers” play important yet different roles for different types of cross-border delegated portfolio management. Our results suggest that trust acts as a fundamental building block for delegated portfolio management.

We use an exogenous event, namely, the spillover effects of Hurricane Katrina on corporate bonds through the liquidation of bond holdings by insurance companies, to study how companies react to temporary changes in the relative availability of bond and bank financing. We find that the negative shock on bonds induces firms to shift from bond financing to bank-based borrowing and to shorten the debt maturity. This shift in debt policy does not revert in the long term. There is no significant change in capital structure, suggesting that the substitution from bonds to bank loans is sufficient for the amount of borrowing.

We study the link between information barriers in global markets and the organizational form of asset management. Fund families outsource funds in which they are at an informational disadvantage to generate performance. Using a structural model of self-selection, we endogenize the outsourcing decision and estimate positive gains from outsourcing of 4–14 basis points per month, thereby reconciling underperformance of outsourced funds with performance maximization by fund families. The gains from outsourcing provide a novel proxy for the information barriers that segment global financial markets: The more segmented the underlying markets where the funds invest, the larger the gains from outsourcing.

Short sellers trade more on days with qualitative news, that is, news containing fewer numbers. We show that this behavior is not informationally motivated but can be explained by short sellers exploiting higher liquidity on such days. We document that liquidity and noise trading increase in the presence of qualitative news, enabling short sellers to better disguise their informed trades. Natural experiments support our findings. Qualitative news has a bigger effect on short sellers’ trading after a decrease in liquidity following the stock’s deletion from the Standard & Poor’s 500 index and a smaller effect when investor attention is distracted by the Olympic Games.

We show that the currency risk embedded in the benchmarks of international mutual funds negatively affects fund performance. More specifically, a high benchmark-implied currency risk induces funds to invest in markets with less volatile currencies, leading to a higher degree of currency concentration in portfolio holdings. This currency concentration, however, departs from the optimal equity allocation strategy across countries and reduces fund performance. We document that funds resorting to high currency concentrations underperform funds with low currency concentrations by as much as 1%–2% per year.

We show that mutual funds employ portfolio strategies based on market sentiment. We build a proxy for the degree of a fund’s sentiment beta (or FSB). The low-FSB funds outperform high-FSB funds, even after controlling for standard risk factors and fund characteristics. This effect is sizable and delivers a net-of-risk performance of 3.8% per year. Funds with a lower FSB follow more idiosyncratic strategies, suggesting that FSB is a deliberate, active choice of the fund manager. A sentiment contrarian strategy leads to high flows due to its superior performance, whereas a sentiment catering strategy fails to attract significant investor flows.

We study what determines catering through the payout policy and how catering affects firm value. We create a catering index, measuring how the firm caters to its investors’ payout preferences. The index is based on the revealed payout preferences of mutual funds holding the firm’s stocks. Catering is constrained by market segmentation and dispersion in investor payout preferences. It is also associated with positive value effects: Firms increasing their catering index also experience an increase in value. Furthermore, greater catering ability is associated with a more positive market reaction to corporate announcements of equity issues and dividend payouts.

We study the value of stock liquidity in the market for corporate control and show that the target firm’s liquidity has an impact on the transaction itself and on the resulting merged entity. We use a sample of U.S. merger and acquisition (M&A) transactions (1987–2007) to show that acquiring a more liquid firm makes the stock of the acquirer more liquid. This has consequences for M&A activity and pricing. Public acquirers are more likely than private acquirers to acquire more liquid targets. Liquidity also translates into a greater likelihood of completing the deal and higher compensation for the target.

We study the role played by the informal links, or “connections,” between the chief executive officer (CEO) and the divisional managers of conglomerate organizations. Using data on a large sample of multisegment U.S. corporations from 1996 to 2004, we show that segments run by connected managers receive more investment and exhibit lower sensitivity to cash flow shortfalls (and exhibit higher sensitivity to other segments’ cash flow). At the firm level, having more connected managers presiding over segments with high Tobin’s Q improves resource allocation and increases firm value. These findings are consistent with the hypothesis that the mutual trust associated with connections reduces the need for wasteful reallocation of resources across divisions of conglomerate firms.

We use a two-year panel of individual accounts in an S&P 500 index mutual fund to examine the trading and investment behavior of more than 91,000 investors who have chosen a low-cost, passively managed vehicle for savings. We identify classes of momentum investors and contrarian investors. We use these classes to build up “behavioral factors” based on contrarian and momentum flows and we show that they are relevant for pricing. They perform well against a benchmark of loadings on latent factors extracted from returns.