Knowledge that Transforms

We show that bonds issued by financial firms have higher spreads than bonds issued by industrial firms with the same rating and maturity, a difference that we refer to as the financial premium. Over the period 1987 to 2020, in the United States, this premium is 43 basis points on average, with the premium higher for lower ratings, higher during financial crises, and increasing in bond beta. We derive a model that explains the financial premium: banks hold diversified portfolios of nonfinancial debt, and bank debt therefore reflects more systematic risk than nonfinancial debt.

I show that the recent returns to environmental, social, and governance (ESG) investing are strongly driven by price impact from flows toward ESG portfolios. Using data on trades, I estimate the market's ability to accommodate ESG flows, which is given by the elasticity of substitution between ESG and other stocks. I show that every dollar flowing toward a representative ESG portfolio increases the market value of ESG stocks by $0.8. The growing institutional flows into the ESG portfolio are the main driver of ESG returns and have caused an annual flow‐driven return of 1.9%. In the absence of flows, ESG stocks would not have outperformed the market from 2012 to 2023.

We document that the convenience yield of U.S. Treasuries exhibits properties consistent with a hedging perspective of safe assets, that is, Treasuries are valued highly if they appreciate with poor aggregate shocks. In particular, the convenience yield tends to be low when the covariance of Treasury returns with the aggregate stock market returns is high. A decomposition of the aggregate stock‐bond covariance into terms corresponding to the convenience yield, the frictionless risk‐free rate, and default risk reveals that the covariance between stock returns and the convenience yield itself drives the effect in a substantive capacity.

Institutional investors are less likely to support shareholder proposals on environmental and social issues for firms headquartered in Republican‐led states. The decline in support has become more pronounced in recent years, aligning with politicians emphasizing companies’ social responsibility efforts, and among firms receiving state‐level subsidies and tax breaks. Investor support also varies with shifts in state leadership, dropping by 12 percentage points in the same state when Republicans are in control instead of Democrats. The findings indicate that institutional investors prioritize maximizing shareholder value and that politicians can influence investor votes by altering the value implications of shareholder proposals.

I develop a control function methodology robust to endogenous or mismeasured regressors in hazard models. Applying the estimator to the subprime mortgage crisis, I quantify what caused the foreclosure rate to triple across the 2003 to 2007 subprime cohorts. To identify the elasticity of default to housing prices, I use various home price instruments including historical variation in home price cyclicality. Loose credit played a significant role in the crisis, but much of the increase in defaults across cohorts was caused by price declines unrelated to lending standards, with a 10% price decline increasing subprime mortgage default rates by 50%.

Discretionary announcement timing generates high conditional risk premia of stock returns and a pattern of negative drifts followed by positive jumps. Average announcement returns are much larger than unconditional risk premia. Capital Asset Pricing Model alphas turn negative when conditioning on nondisclosure because betas rise faster than risk premia prior to disclosures, but average announcement returns may appear to be too large relative to market risk when betas are estimated from past returns. The effects are amplified when multiple firms exercise discretion over the timing of correlated announcements. We present evidence that firms time earnings announcements in a manner consistent with our model.

How did #MeToo alter collaboration between women and men? I show junior female researchers start fewer projects after #MeToo. A decrease in collaborations with male coauthors—especially new senior male coauthors at the same institution—largely explains the decline. The decrease is larger at universities with higher perceived harassment accusation risk and smaller where both women and men publicly express greater awareness of gender issues. I find no evidence that reduced collaboration improves research outcomes for junior female researchers. The results suggest that #MeToo led to a breakdown in trust that came at a cost for junior women's career opportunities.

Customers in over‐the‐counter (OTC) markets must find a counterparty to trade. Little is known about this process, however, because existing data consist of transaction records, which only reveal the outcome of a search. Using data from a trading platform for corporate bonds, we unpack the search process. We analyze how long it takes customers to trade and how dealers' offers evolve across repeated inquiries. We estimate that it takes two to three days to complete a transaction after an unsuccessful attempt, with substantial variation across trade and customer characteristics. Our analysis offers insights into the sources of trading delays in OTC markets.

Why do fire sales occur if many risks are hedgeable? We study a version of Brunnermeier and Sannikov (2014, American Economic Review 104, 379–421) in which all fundamental risks can be hedged frictionlessly. Our analysis shows that fire sales are inherently self‐fulfilling. Fundamental shocks can never cause fire sales, and an efficient, safe equilibrium exists. On the other hand, there exists an equilibrium in which agents coordinate fire sales on nonfundamental shocks. A simple refinement based on vanishingly small perceived fundamental risk eliminates the safe equilibrium and selects the fire‐sale equilibrium as the unique outcome.

This paper estimates the cross‐sectional distribution of Epstein‐Zin preferences using the wealth and risky portfolio shares of a large panel of Swedish households. We find modestly heterogeneous risk aversion (standard deviation 0.97, median 7.50) and a meaningfully heterogeneous and right‐skewed time preference rate (TPR; standard deviation 7.31%, median 4.08%) and elasticity of intertemporal substitution (EIS; standard deviation 3.17, median 0.70). Risk aversion and the EIS are only very weakly negatively correlated. We estimate lower risk aversion for households with riskier labor income, and a higher TPR and lower EIS for households that enter our sample with low wealth.