Knowledge that Transforms

We surveyed all Chinese public firms in 2019 and 2022 to examine the real effects of financial markets. Over 90% of firms say they actively monitor the stock market, and the most common reasons they provide are that they learn new information from the price and that they depend on the price for financing. Focusing on the learning channel, we examine how the responses relate to firm characteristics and actions. Firms that indicate learning have characteristics that suggest greater benefit from market information. They also exhibit higher investment-to-price sensitivity. We provide results on what dimensions of information firms learn about.

Operation of residential buildings is responsible for roughly 22% of global energy consumption and 17% of CO 2 emissions. We study the investments triggered by a regulatory intervention requiring rented properties to satisfy minimum energy efficiency standards. The analysis shows significant investments in low capital expenditure retrofits. Using an instrumented difference-in-differences methodology, we show that the investments do not have an economically significant impact on rents, so that landlords are not compensated for them.

We test whether forecast bias affects household stock trading by combining measures of bias elicited in laboratory experiments with administrative trade-level data. On average, subjects exhibit positive forecast bias (i.e., extrapolators), while a large minority exhibit negative forecast bias (i.e., contrarians). Forecast bias is positively associated with past excess returns of stocks that are purchased: Extrapolators (contrarians) purchase past winners (losers). Forecast bias is negatively associated with the capital gains of stocks that are sold. Furthermore, forecast bias explains investor heterogeneity in the relation between market returns and net flows to stocks. Overall, our study provides evidence of a common mechanism – forecast bias – that links past returns to trading decisions for purchases, sales, and net flows.

We study the rationale behind firms’ investment in risky financial assets by formulating and estimating a dynamic model in which firms allocate their precautionary savings to both safe and risky securities. In equilibrium, risky financial asset holdings are positively related to the sensitivity of a firm’s financing deficit to the risky asset returns—the “financing deficit beta”. Using a comprehensive sample of US corporate financial asset holdings, we find evidence of a positive correlation between risky financial asset holdings and financing deficit betas that capture firms’ incentives to hedge interest-rate risk. Precautionary motives are stronger in small, high-volatility, and R&D-intensive firms.

This paper studies the interaction between process and product innovations and their distinct role in firm growth dynamics. We differentiate empirically and theoretically two types of process innovations: foundational processes that advance production technology and cost-reducing processes that enhance existing production efficiency. We develop an innovation model of product varieties with quality heterogeneity to illustrate how these innovations impact firm growth differently and highlight how process innovation induces product innovation. By analyzing millions of patent texts from 1900 to 2020, we classify innovations into product, cost-reducing process, and foundational process innovations. We find that foundational processes lead to sustained firm growth, especially through their effect on subsequent product creation. R&D-intensive firms focused on “deep-tech” innovations have an advantage in creating foundational processes, resulting in superior product quality. Using patents linked to FDA-approved drugs, we show that firms with a comparative advantage in creating foundational processes, due to greater knowledge and technological stock, tend to produce higher-value products.