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We investigate the compensation of counterparty exposure in the prices of structured products. Our analysis reveals that product issuers did not compensate retail investors for counterparty exposure before the Lehman default. Post‐Lehman, retail prices have no longer neglected this risk. We also measure retail investor attention towards issuer credit risk. For a given level of issuer credit risk, counterparty exposure is compensated more when attention is higher. Furthermore, issuers tend to construct products with larger counterparty exposure. Overall, our results shed light on the conditions under which financial engineering generates neglected risk.

Does earnings management, even though legal, hinder investor trust in reported earnings? Or do investors regard earnings management as a way for firms to convey private information, or simply as a neutral feature of financial reporting? We find that past abstinence from earnings management increases investor responses to future earnings surprises. Importantly, this effect occurs in industries where investor trust has recently been violated, and where managers would in the past have had incentives and opportunities to misrepresent earnings. Overall, investors seem to interpret the extent to which management resists temptations for misreporting as a "litmus test" of trustworthiness.

Donald Trump’s 2016 election and his nomination of climate skeptic Scott Pruitt to head the Environmental Protection Agency drastically downshifted expectations about U.S. policy toward climate change. Joseph Biden’s 2020 election shifted them dramatically upward. We study firms’ stock-price movements in reaction to these changes. As expected, the 2016 election boosted carbon-intensive firms. Surprisingly, firms with climate-responsible strategies also gained, especially those firms held by long-run investors. Such investors appear to have bet on a “boomerang” in climate policy. Harbingers of a boomerang appeared during Trump’s term. The 2020 election marked its arrival. (JEL G14, G38, G41)

We argue that incentives to take equity risk (”equity incentives”) only partially capture incentives to take asset risk (“asset incentives”). This is because leverage, while central to the theory of risk-shifting, is not explicitly considered by equity incentives. Employing measures of asset incentives that account for leverage, we find that asset risk-taking incentives can be large compared to incentives to increase firm value. Stock holdings can induce substantial risk-taking incentives, contrary to the assumption that only stock options drive risk-taking. Finally, asset incentives help explain asset risk-taking of U.S. financial institutions before the 2007/08 crisis.

The negativity of managerial word choice (managerial tone) in conference calls is a telltale indicator of a company’s future. Specifically, increases in negativity–what we term “bleak tone changes”...

Donald Trump's surprise election shifted expectations: corporate taxes would be lower and trade policies more restrictive. Relative stock prices responded appropriately. High-tax firms and those with large deferred tax liabilities (DTLs) gained; those with significant deferred tax assets from net operating loss carryforwards (NOL DTAs) lost. Domestically focused companies fared better than internationally oriented firms. A price contribution analysis shows that easily assessed consequences (DTLs, NOL DTAs, tax rates) were priced faster than more complex issues (net DTLs, foreign exposure). In sum, the analysis demonstrates that expectations about tax rates greatly impact firm values.

Does the presence of immigrants in one's neighborhood affect voting for far right-wing parties? We study the case of the Freedom Party of Austria (FPÖ) that, under the leadership of Jörg Haider, increased its vote share from less than 5% in the early 1980s to 27% by the end of the 1990s and continued to attract more than 20% of voters in the 2013 national election. We find that the inflow of immigrants into a community has a significant impact on the increase in the community's voting share for the FPÖ, explaining roughly a tenth of the regional variation in vote changes. Our results suggest that voters worry about adverse labor market effects of immigration, as well as about the quality of their neighborhood. In fact, we find evidence of a negative impact of immigration on "compositional amenities”. In communities with larger immigration influx, Austrian children commute longer distances to school, and fewer daycare resources are provided. We do not find evidence that Austrians move out of communities with increasing immigrant presence.

A major obstacle for research in international asset pricing and corporate finance has been a lack of reliable and publicly available data on international common risk factors and portfolios. To address this gap, we provide a step-by-step description of how appropriately screened data from Thomson Reuters Datastream and Thomson Reuters Worldscope can be used to construct high-quality systematic risk factors. We provide common risk factors for 23 countries across the globe. To demonstrate the use of this dataset, we present evidence of an “extreme” size premium in a large number of countries. These premia, however, are often not realizable or at least significantly eroded due to transaction costs.

Individuals differ profoundly when they decide whether to tell the truth or to be dishonest, particularly in situations where moral motives clash with economic motives, i.e., when truthfulness comes at a monetary cost. These differences should be expressed in the decision network, particularly in prefrontal cortex. However, the interactions between the core players of the decision network during honesty-related decisions involving trade-offs with economic costs remain poorly understood. To investigate brain connectivity patterns associated with individual differences in responding to economic costs of truthfulness, we used functional magnetic resonance imaging and measured brain activations, while participants made decisions concerning honesty. We found that in participants who valued honesty highly, dorsolateral and dorsomedial parts of prefrontal cortex were more tightly coupled with the inferior frontal cortex when economic costs were high compared to when they were low. Finer-grained analysis revealed that information flow from the inferior frontal cortex to the dorsolateral prefrontal cortex and bidirectional information flow between the inferior frontal cortex and dorsomedial prefrontal cortex was associated with a reduced tendency to trade off honesty for economic benefits. Our findings provide a novel account of the neural circuitry that underlies honest decisions in the face of economic temptations.

Extreme-right-wing (ERW) parties are on the rise in many countries. Moreover, there is an alarmingly high cross-country correlation between the election success of ERW parties and immigration. Motivated by this evidence, we explore one potentially important channel through which immigration may drive support for ERW parties: the presence of immigrants in the voters' neighborhoods. We study the case of the Freedom Party of Austria (FPÖ). Under the leadership of Jörg Haider, this party increased its share of votes from less than 5 percent in the early 1980s to 27 percent by the year 1999. We exploit specific features of the history of immigration into Austria to identify a causal effect of immigration on ERW voting results. We argue that the sudden, large inflow of immigrant workers in the 1960s generated immigrant settlement patterns that provide a plausible source of exogenous variation in the more recent spatial distribution of immigrants. We find that the percentage immigrants in a community is an important causal factor behind support for the extreme right, explaining roughly a quarter of the cross-community variance in votes for the FPÖ. The effect varies across immigrants (e.g., based on their skill levels) as well as across communities (e.g., based on the degree of skill overlap between immigrants and natives), supporting the idea that voters worry about labor market competition. We find more limited indications that compositional amenities play a role for ERW votes.