We identify a specific channel (debt covenants) and the corresponding mechanism (transfer of control rights) through which financing frictions impact corporate invest-ment. Using a regression discontinuity design, we show that capital investment de-clines sharply following a financial covenant violation, when creditors use the threat of accelerating the loan to intervene in management. Further, the reduction in in-vestment is concentrated in situations in which agency and information problems are relatively more severe, highlighting how the state-contingent allocation of control rights can help mitigate investment distortions arising from financing frictions. WHILE PREVIOUS RESEARCH HAS CLEARLY ANSWERED THE QUESTION of whether financ-ing and investment are related, it has been much less clear on how financing and investment are related (Stein (2003)). In other words, the precise mech-anisms behind this relationship are largely unknown. Further, the extent to which these mechanisms mitigate or exacerbate investment distortions arising from underlying financing frictions is largely unknown as well. The goal of this

forthcoming in the Journal of Finance Motivating innovation is important in many incentive problems. This paper shows that the optimal innovation-motivating incentive scheme exhibits substantial toler-ance (or even reward) for early failure and reward for long-term success. Moreover, commitment to a long-term compensation plan, job security, and timely feedback on performance are essential to motivate innovation. In the context of manage-rial compensation, the optimal innovation-motivating incentive scheme can be im-plemented via a combination of stock options with long vesting periods, option repricing, golden parachutes, and managerial entrenchment.

Comments are welcome. We examine public companies that choose to “go dark ” , i.e., cease reporting to the SEC by deregistering their common stock, but continue to trade in the over-the-counter market. A firm can simply deregister by filing a one page form with the SEC, provided that the firm satisfies certain criteria, most notably having fewer than 300 holders of record (or 500 holders for smaller firms). In 2003 alone, over 200 companies went dark, raising concerns that recent changes to U.S. securities regulation and the associated costs are driving firms to deregister their stock. This study analyzes the rationales for, and economic consequences of, voluntary dereg-istrations from 1998 to 2003. We document a large negative abnormal return at the announcement and filing of deregistration, particularly for smaller firms, sug-gesting that cost savings alone are unlikely to be the reason for firms going dark. Consistent with the reduction in disclosure, we find a significant drop in trading volume after deregistration. We use a probit analysis to compare our going dark sample to firms that went private over this period, as well as to a control sample of firms that were eligible to go dark based on their number of holders of record, but chose to continue reporting. The evidence on firm performance, growth prospects and ownership structures is consistent with insiders opting out of SEC reporting for private control benefit reasons, as well as managers and investors reacting to the firm’s diminished future prospects.

We show that a large number of significant financing decisions of solvent firms are dictated by creditors, who use the transfer of control accompanying financial covenant violations to address the misalignment of incentives between managers and investors. After showing that financial covenant violations occur among almost one third of all publicly listed firms, we find that creditors use the threat of accelerating the loan to reduce net debt issuing activity by over 2 % of assets per annum immediately following a covenant violation. Further, this decline is persistent in that net debt issuing activity fails to return to pre-violation levels even after two years, resulting in a gradual decline in leverage of almost 3%. These findings represent the first, of which we are aware, piece of empirical evidence highlighting the role of control rights in shaping corporate financial policies outside of bankruptcy. “[Ross] Johnson explained that he was looking for a structure in which he would retain significant control of his company…He remembered the backbreaking trips to GSW’s bankers twenty years before and cringed. Banks…cramped his style.”-Barbarians at the Gate “The Credit Facility also requires the company to meet certain financial ratios and tests. These covenants…significantly limit the operating and financial flexibility of the Company and limit its ability to respond to changes in its business…”

Abstract We survey CFOs of public and private firms in 29 countries about aspects of corporate liquidity that cannot be obtained from publicly available data. Lines of credit are very important liquidity instruments relative to cash holdings. The median line of credit is equal to 15 percent of book assets whereas cash holdings comprise only 9 percent of book assets. Of these cash holdings, the fraction held as non-operational cash (rather than held for day-to-day operations) is only about 40% of the total. Cash provides unconditional liquidity, and lines of credit provide conditional liquidity. Without any market imperfections, these should be perfect substitutes. We find evidence that where lines of credit are more assured, managers do view these two as substitutes. Generally, however, cash and lines of credit are held for different purposes. Lines of credit are strongly related to a firm's need for external financing to fund future investment opportunities. Non-operational cash is primarily held as a general buffer against future cash shortfalls. Across countries, firms make greater use of lines of credit when external credit markets are poorly developed. ____________________________________ * Email addresses for the authors are finkvl@business.utah.edu, hservaes@london.edu, and ptufano@hbs.edu. We thank an anonymous referee, Tom Aabo, Heitor Almeida, James Ballingall, Mark Carey, Ricardo Correa, Adrian Crockett, John Graham, Fred Harbus, Roger Heine, Terri Lins, Bill Schwert, Ane Tamayo, Marc Zenner, conference participants at the 2008 American Finance Association meetings, and seminar participants at the University of Aarhus, the University of California at Davis, the Federal Reserve Board, Florida State University, Queens University, Southern Methodist University, the Stockholm School of Economics, Texas Christian University, and Texas Tech University for helpful discussions. We acknowledge the financial support of the University of Utah, London Business School, and Harvard Business School. What Drives Corporate Liquidity? An International Survey of Cash Holdings and Lines of Credit Abstract We survey CFOs of public and private firms in 29 countries about aspects of corporate liquidity that cannot be obtained from publicly available data. Lines of credit are very important liquidity instruments relative to cash holdings. The median line of credit is equal to 15 percent of book assets whereas cash holdings comprise only 9 percent of book assets. Of these cash holdings, the fraction held as non-operational cash (rather than held for day-to-day operations) is only about 40% of the total. Cash provides unconditional liquidity, and lines of credit provide conditional liquidity. Without any market imperfections, these should be perfect substitutes. We find evidence that where lines of credit are more assured, managers do view these two as substitutes. Generally, however, cash and lines of credit are held for different purposes. Lines of credit are strongly related to a firm's need for external financing to fund future investment opportunities. Non-operational cash is primarily held as a general buffer against future cash shortfalls. Across countries, firms make greater use of lines of credit when external credit markets are poorly developed.

We thank the helpful comments from Joel Demski and participants of the workshops at

Abstract: We investigate the link between compensation and risk-taking among finance firms during the period of 1992-2008. First, there are substantial cross-firm differences in residual pay (defined as total executive compensation controlling for firm size). Second, residual pay is correlated with pricebased risk-taking measures including firm beta, return volatility, the sensitivity of firm stock price to the ABX subprime index, and tail cumulative return performance. Third, these risk-taking measures are correlated with pay even though executives are highly incentivized as measured by insider ownership. Finally, compensation and risk-taking are not related to governance variables but covary with ownership by institutional investors who tend to have short-termist preferences and the power to influence firm management policies. Our findings suggest that our residual pay measure is picking up other important high-powered incentives not captured by insider ownership. They also point to substantial heterogeneity in both firm culture and investor preferences for short-termism and risk-taking. _____________________ We thank

We examine earnings management behavior around SEOs, focusing on both real activities and accrual-based manipulation, and how this behavior varies over time and cross-sectionally. Although research has addressed the issues of earnings management around SEOs and earnings management via real activities manipulation, ours is the first paper to put these two issues together. We make three contributions to the literature. First, we document that firms use real, as well as accrual-based, earnings management tools around SEOs. Second, consistent with the expectation that the Sarbanes-Oxley Act (SOX) has made accrual-based earnings management more costly, we find that firms have substituted from accrual to real earnings management after SOX. Finally, we show how the tendency for firms to tradeoff real versus accrual-based earnings management activities around SEOs varies cross-sectionally. We find that firms ’ choices vary predictably as a function of the firm’s ability to use accrual management and the costs of doing so. Our model is a first step in examining how firms tradeoff between real versus accrual methods of earnings management.

This study investigates security analysts ' reactions to public management guidance and assesses whether managers successfully guide analysts toward beatable earnings targets. We use a panel data set between 1995 and 2001 to examine the fiscal-quarter-specific determi-nants of management guidance and the timing, extent, and outcomes of analysts ' reactions to this guidance. We find that management guidance is more likely when analysts ' initial forecasts are optimistic, and, after controlling for the level of this optimism, when analysts' forecast dispersion is low. Analysts quickly react to management guidance and are more likely to issue final meetable or beatable earnings targets when management provides public guidance. Our evidence suggests that public management guidance plays an important role in leading analysts toward achievable earnings targets.

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