Knowledge that Transforms

We consider an informed large shareholder who can choose between making a takeover bid herself and initiating a sale to another acquirer. Such takeover activism complements direct takeovers because the very choice mitigates the asymmetric information problem, thereby improving efficiency. As more investors enter the market for corporate control, takeover activism increasingly replaces direct takeovers as the prevailing mode of disciplinary control change, matching the evolution in practice. Our model shows how this evolution, characterized by a symbiotic relationship between investor activism and private equity, arises to overcome asymmetric information and collective action problems through intermediated transactions.

Experimental asset markets provide a controlled approach to studying financial markets. We attempt to replicate 17 key results from four prominent studies, collecting new data from 166 markets with 1,544 participants. Only three of the 14 original results reported as statistically significant were successfully replicated. We fail to replicate findings on emotions, self‐control, and gender differences in bubble formation but confirm that experience reduces bubbles and cognitive skills explain trading success. Our study demonstrates the importance of replications in enhancing the credibility of scientific results in this field.

We derive bounds on the rational variation in option‐implied beliefs about market returns. While risk preferences distort option‐implied (or risk‐neutral ) beliefs away from subjective beliefs, one can nonetheless bound risk‐neutral belief movement under a general assumption on the stochastic discount factor. The resulting test requires no knowledge of the objective distribution and allows significantly more flexibility in discount rates than standard volatility tests. Implementing our test empirically using index options, we find that there is so much movement in risk‐neutral beliefs that the bounds are routinely violated. Our results imply significant excess index‐price volatility.

We develop a model to study the efficiency of socially responsible investing (SRI) as a mechanism to control firms' externalities. When SRI is not too popular, responsible investors favor strategies that lead to a concentration of SRI in a subset of firms in the economy. This concentration can mitigate coordination issues in adopting green technologies, but it can also crowd out the green investments of excluded firms and increase the price of green products. In equilibrium, responsible investors continue to favor concentration even as SRI becomes more popular, and concentrate the most when concentration is least desirable.

Prevailing theories of financial intermediation assume an integrated financial sector with frictionless risk‐sharing. However, we identify substantial risk‐sharing frictions linked to intermediary specialization using currency derivatives markets as a laboratory. Using confidential supervisory data covering $25 trillion in daily bank exposures, we document imperfect hedging in banks' FX‐swap intermediation: banks rarely hedge their synthetic dollar lending with maturity‐matched foreign safe assets. Intermediaries specialize in markets in which they have expertise in managing the associated exposures, giving rise to cross‐market variation in deviations from covered‐interest parity. Our results highlight the importance of intermediary specialization and its impact on risk premia.

How do recent advances in Generative Artificial Intelligence (AI) affect firm value? We construct the first measure of firms' workforce exposures to Generative AI and show that an “Artificial‐Minus‐Human” portfolio earned 5% in the two weeks following the release of ChatGPT. The labor‐exposure effect is more pronounced for firms with greater data assets and is distinct from the effect of firms' product exposures to AI. We assess whether exposed workforces are substituted or complemented by Generative AI based on whether their exposed tasks are core or supplemental. Examining firms' labor demand and profitability following the release of ChatGPT supports a labor‐technology substitution channel.

Firms tend to compete more aggressively when facing financial distress. This intensified competition reduces profit margins, pushing them further into distress and adversely affecting their industry peers. To study such feedback and contagion effects, we incorporate strategic competition in a dynamic model with long‐term defaultable debt, exploring various peer interactions such as predation and price wars. The feedback effect represents a novel source of financial distress costs associated with leverage, which helps explain the negative profitability‐leverage relation across industries. Owing to the contagion effect, firms' optimal leverage is often excessively high from an industry perspective, undermining the industry's financial stability.

I show how firms optimize the allocation of charitable funds around investments that require external stakeholder support, such as mergers and acquisitions. Acquirers increase donations to target‐related charities before making a takeover offer, but scale funds back after withdrawing from a deal. Firms redistribute funds from nontakeover‐related areas to target insider–affiliated charities, employee communities, and counties with a regulatory presence. Targeted donations that encourage blockholder reciprocity and employee commitment are associated with better deal performance through decreased merger premiums and lower integration costs. Overall, the results highlight firms’ use of philanthropy to manage stakeholder relations in takeover decisions.

We document that the nature of aggregate consumption dynamics changes when the bond‐stock correlation switches sign. We identify three regimes in a real‐time, sequential learning framework: two highly persistent regimes where permanent or transitory consumption shocks are more dominant, and a largely transitory disaster regime. We study the implications for asset prices. The transition from the second to the first regime in the late 1990s makes the correlation between equities and real bonds switch from positive to negative as in the data, providing an explanation from the perspective of real consumption dynamics. The findings extend to the international setting.

Using a novel data set of multi‐country credit registers and an institutional change from national to supranational supervision, we show that supranational banking supervision can increase credit supply while mitigating excessive risk‐taking. Supranational supervision increases credit supply only in financially stressed countries while reducing the credit supply to the riskiest (zombie) firms. These improved lending effects stem from weaker national institutions, differential national supervisory incentives, lower national supervisory abilities, and weaker national insolvency laws. Moreover, improved access to external finance from wholesale and bond markets as well as lower risk‐weighted assets allow supranationally supervised banks to expand the supply of credit. Overall, despite some supranational supervisory arbitrage, supranational supervision decreases firm‐level credit to the riskiest firms while increasing firm‐level credit availability in stressed countries without reducing it in nonstressed countries.