Knowledge that Transforms

This article presents a general conceptual and statistical framework for measuring the severity of financial crises on a continuous scale and in real time. It results in a composite index that operationalizes the concept of systemic financial stress. The framework nests many existing financial stress and systemic risk indicators as special cases. The Composite Indicator of Systemic Stress (CISS) is introduced as an index design that provides crisis signals which are timely, robust, and free of look-ahead bias. The CISS aggregates a representative set of market-specific stress indicators using their time-varying cross-correlations as systemic risk weights. Confirming its nature as a crisis severity measure, empirical analysis shows that the CISS has strong short-term predictive and nowcasting power for economic activity, and that these effects are stronger in bad states of the economy.

Large firms typically increase their cash holdings as they grow to buffer against greater cash flow volatility. However, data on 11.2 million small firms show the opposite: cash levels decline as firms expand. We explain this phenomenon through a liquidity management model. Small firms with limited cash flows rely on cash reserves for investment due to costly external financing. As they grow, they do not fully replenish their cash reserves because investment incentives decrease, and increased cash flows support more of their anticipated investments. This mechanism generates a negative correlation between cash holdings and firm size among small firms.

In Kyle (1985), the ratio of fundamental variance to price impact measures the value of information to a monopolist strategic informed investor. We show that this same statistic provides an approximation for the value of information in a more general setting with multiple differentially informed investors, and estimate it using high-frequency stocks data. We find that the value of information rises during crises. The value of information is higher for large, growth, and momentum stocks. Its most dramatic spikes occur at the start of the Covid-19 pandemic and the financial crisis of 2008, when the Fed announces liquidity facilities.

I document that the network structure of the online economy significantly contributes to rising industry concentration. Firms that are central in the online economy benefit more from increased economies of scale, decreased search costs, and network effects resulting from digitalization. Industries with firms that are more central become more concentrated and central firms have larger increases in market share. These results are driven by firms’ ability to generate revenue, as evidenced by central firms earning higher risk-adjusted returns and having more positive earnings surprises. Centrality is also associated with increasing productivity, but profitability only increases for central firms in business-to-consumer industries.

This study introduces a novel mood metric—blockbuster movie releases—and investigates its correlation with stock market dynamics. We document a significant positive correlation between blockbuster movie releases and US stock market returns in the subsequent week. This pattern remains robust across various robustness tests both in-sample and out-of-sample. The changes in weekly box office revenue and increased Internet searches for movie-related terms further affirm this relationship. Moreover, releases of blockbuster movies predict lower expected market volatility and risk aversion. The positive predictive effect on market returns is also evident in international markets.

This article examines whether agency conflicts introduced by securitization affect servicers’ asset liquidation decisions. We find securitized loans are 25.4–28.5 percent less likely to be liquidated via short sales than portfolio loans. Securitized loan servicers’ bias against short sales does not represent an agency conflict if short sale and real estate owned (REO) liquidations are equally efficient. However, we find REOs have significantly lower average liquidation prices, higher average liquidation expenses, and longer average liquidation times than short sales. Although short sales benefit investors, securitized loan servicers have a financial incentive to pursue REOs.

This article explores the influence of single-child CEOs on corporate innovation and culture within the context of China’s one-child policy. Utilizing multiple identification strategies, we find that firms led by single-child CEOs invest significantly less in innovation and generate fewer and lower-impact patents. Examining the underlying economic mechanisms, we find that these CEOs foster a corporate culture that discourages trust and collaboration, leading to increased inventor departures. Additionally, firms under their leadership exhibit lower idiosyncratic risk, aligning with the typically cautious behavior of only children. Our analysis demonstrates that these outcomes are primarily driven by behavioral traits associated with being an only child, including self-centeredness, reduced team orientation, and heightened risk aversion. Overall, the study sheds light on how the singular upbringing of single-child CEOs shapes corporate behavior and performance, revealing the broader, enduring economic consequences of national population policies.

While bank supervisors frequently cooperate across countries, novel data on 268 cooperation agreements reveal that such cooperation falls short of covering the global operations of large banking groups. We show that this causes material regulatory arbitrage: banking groups allocate lending activities and risk into third-country subsidiaries when cooperation agreements cover their operations in other countries. The average distortion in a country’s foreign lending caused by regulatory arbitrage is 21 percent, with the effect being magnified in the presence of a weak supervisory framework. Taken together, our results indicate that incompleteness in cooperation substantially diminishes its global effectiveness.

An influential emerging literature documents strong correlations between carbon emissions and stock returns. We re-examine those data and conclude that these associations are driven by two factors. First, stock returns are correlated only with unscaled emissions estimated by the data vendor, but not with unscaled emissions actually disclosed by firms. Vendor-estimated emissions systematically differ from firm-disclosed emissions and are highly correlated with financial fundamentals, suggesting that prior findings primarily capture the association between such fundamentals and returns. Second, unscaled emissions, the variable typically used in academic literature, is correlated with stock returns but emissions intensity (emissions scaled by firm size), an equally important measure used in practice, is not. While unscaled emissions represent an important metric for society, we argue that, for individual firms, emissions intensity is an appropriate measurement choice to assess carbon performance. The associations between emissions and returns disappear after accounting for either of the issues above.

Over fifty countries have introduced regulatory sandboxes to foster financial innovation. This article conducts the first evaluation of their ability to improve fintechs’ access to capital and attendant real effects. Exploiting the staggered introduction of the UK sandbox, we establish that firms entering the sandbox see an increase of 15% in capital raised post-entry. Their probability of raising capital increases by 50%. Sandbox entry also has a significant positive effect on survival rates and patenting. Investigating the mechanism, we present evidence consistent with lower asymmetric information and regulatory costs.