We analyze a novel feedback mechanism between market and funding liquidity that causes self-fulfilling liquidity dry-ups. Financial firms facing funding withdrawals have an incentive to acquire information about their assets. Those with good assets gain by resorting to outside liquidity sources...

Structured finance is often mentioned as the main cause of the latest financial crisis. We argue that structured finance per se did not trigger the last financial crisis. The crisis was propagated around the world because of poor risk management such as agency problems in the securitization...

This paper examines the effect of trade secrets protection on stock price crash risk. Using an experimental setting with the Uniform Trade Secrets Act (UTSA), we find that firms headquartered in states with the UTSA tend to have higher stock price crash risk. The results are robust to...

What sows the seeds of financial crises and what policies can help avoid them? To address these questions, I model the interaction between the ex-ante production of assets and ex-post adverse selection in financial markets. My results indicate that taking into account the endogenous asset supply...

This study proposes a rational expectation equilibrium model of crashes in an economy with information asymmetry and loss averse speculators. We obtain a state-dependent linear optimal trading strategy, which makes the equilibrium price tractable for the first time in such an economy. The model...

This study shows that less readable 10-K reports are associated with higher stock price crash risk. The results are consistent with the argument that managers can successfully hide adverse information by writing complex financial reports, which leads to stock price crashes when the hidden bad...

Using a large sample of U.S. public firms, we find robust evidence that short interest is positively related to one-year ahead stock price crash risk. The evidence is consistent with the view that short sellers are able to detect bad news hoarding by managers. Additional findings show that the...

What sows the seeds of financial crises, and what policies can help avoid them? I model the interaction between the ex-ante production of assets and ex-post adverse selection in financial markets. Positive shocks that increase market prices exacerbate the production of low-quality assets and can...

Using a large sample of U.S. public firms, we find robust evidence that short interest is positively related to one-year ahead stock price crash risk. The evidence is consistent with the view that short sellers are able to ferret out bad news hoarding by managers. Additional findings show that...

Many market participants invest resources to acquire information about liquidity rather than fundamentals. I show that agents using such information can reduce the magnitude of short-lived pricing errors by trading against liquidity shocks. However, the short-run stabilizing effect of this...