Knowledge that Transforms

The sensitivity of the external finance premium to firms’ net-worth-to-capital ratio is central to the strength of the financial accelerator, yet direct firm-level evidence remains scarce. We estimate this elasticity using balance sheet and income statement data for Swiss nonfinancial firms over 1998–2016. To address the endogeneity of net worth, we employ two complementary instrumental variable strategies: one based on firms’ non-operating income and the other a shift-share design that interacts predetermined exposure to financial income with aggregate dividend returns. Mapping the estimated elasticity into the costly state verification framework as implemented by Bernanke et al. (1999) yields structural monitoring costs of about one quarter of firms’ gross return on capital, with estimates ranging from 0.15 to 0.35 across specifications. Our results provide direct firm-level support for the financial accelerator mechanism and imply monitoring costs of the same order of magnitude as the benchmark calibration of Bernanke et al. (1999).

Prior studies predominantly examine fundamental performance‐driven explanations of loan renegotiations. We contrast with this work by investigating the improvement in secondary loan market trading conditions as a non‐fundamental driver of loan renegotiation. Exploiting a regression discontinuity design around the LSTA 100 Index reconstitution, we find that index‐included loans are around five times more likely to receive interest‐rate–reducing amendments than comparable loans just below the index inclusion threshold. Within‐loan‐package tests confirm that these renegotiations are not driven by changes in the borrower's fundamental performance. The threat of refinancing likely drives this effect, as the results are more pronounced when such threats are more credible.

We examine the spillover effects of local initial public offerings (IPOs) on new business formation. An IPO in a local area is associated with a 1%–4% increase in new business registrations, and this effect is particularly pronounced in counties facing higher economic uncertainty. New business registrations are significantly influenced by the extent of EDGAR downloads related to the IPO firm's public disclosures and the information in the IPO firm's S‐1 disclosure. The findings highlight the role of IPOs in conveying crucial information through signaling of potential success prospects and additional provision of information through disclosures. A field survey of 503 entrepreneurs further supports these conclusions.

We examine how foreign non-income tax shocks affect U.S. product markets. Our setting is the politically motivated tariffs on U.S. whiskey exports levied during the 2018 trade war, which created an exogenous negative foreign demand shock for domestic producers. Using a difference-in-differences design we show that, on average, U.S. whiskey producers decrease U.S. product prices and thus increase domestic sales volume following the export tariffs. However, we find evidence of strategic pricing, as producers increase prices of locally produced products in primary production states (Kentucky and Tennessee) and more significantly decrease prices in states where whiskey consumption is less popular. Further, we show that U.S. whiskey producers implement smaller product price decreases in states with greater tariff-related media exposure and reduce advertising spending nationwide but not in Kentucky and Tennessee. Taken together, these findings provide timely evidence regarding how foreign trade restrictions impact the U.S. product market and consumer outcomes. Data Availability: NielsenIQ Retail Scanner Data are available through the Kilts Center for Marketing at the University of Chicago Booth School of Business (http://research.chicagobooth.edu/nielsen). Kantar Advertising Insights data are available by subscription. GDELT data are available at https://www.gdeltproject.org/.

This paper examines circuitousness, which reflects related information being spread throughout a narrative as opposed to being grouped together. Circuitousness in the MD&A is higher for underperforming firms facing an imminent recovery, a difficult scenario for managers to describe and reconcile. Such firms’ disclosures are accompanied by heightened information processing activity, such as EDGAR downloads and analyst forecast revisions. Additionally, initial return reactions are faster but incomplete, consistent with recoveries and the ensuing circuitousness increasing processing costs that delay price discovery. Changes in institutional ownership are concentrated among quasi-indexers, who rely on public disclosure but rebalance only gradually. Circuitousness is incrementally and more consistently predictive than other textual characteristics that are related but are typically associated with obfuscation, such as the Fog index and repetition. Overall, circuitousness in financial disclosure signals that a turnaround is imminent and corresponds to more costly information processing.