Knowledge that Transforms

Abstract Building on administrative data and machine-learning models, I develop a firm-specific measure of regulatory intensity: cost of compliance with all federal paperwork regulations. Regulatory intensity increases the cost of goods sold and overhead spending (SGA). It also incentivizes companies to reduce capital investment, hire fewer employees, and lobby more. The effects are particularly strong among financially constrained firms and those with irreversible investment opportunities, suggesting that regulation affects companies through budgetary pressures and heightened uncertainty. The findings highlight the real effects of regulation and the underlying mechanisms. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract Using novel shadow bank funding data, I find that shadow banks are funded by the very banks they compete with when originating mortgages. Evidence suggests that banks have market power in the upstream market for shadow banks’ funding, which in turn softens mortgage market competition through their strategic behaviors in both markets. I build and calibrate a quantitative model of vertical integration and competition to show that those consumers who would most benefit from shadow bank services are the ones to bear the costs. Secondary market innovation could increase downstream competition by reducing shadow banks’ reliance on their competitors. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract Stock returns during the week are negatively associated with the reported incidence of domestic violence during the weekend. This relationship is primarily driven by negative returns. The incidence of domestic violence increases with the magnitude of losses, and the effect increases with local stock market participation. Our findings suggest that negative wealth shocks caused by stock market crashes can affect stress levels within intimate relationships, escalate arguments, and trigger domestic violence. Stock market losses may reduce household utility beyond the shock to financial wealth, supporting gain-loss models where disutility from losses outweighs the utility from gains of a similar magnitude. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract This paper studies the effect of deposit insurance on depositor behavior. Our theoretical framework integrates insights from public and financial economics and predicts that (1) deposit insurance induces bunching at the threshold in the deposit distribution and (2) an increase in the insurance threshold promotes deposit growth, particularly higher for individuals bunching at the initial limit. We exploit a large and unexpected increase in the Colombian insurance together with monthly depositor-level records from a major bank to test these predictions. We validate the existence of bunching in deposits and quantify the heterogeneous effect of deposit insurance on individual deposit growth. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract We study the effect of dealer exit on prices and quantities in a model of an over-the-counter market featuring a core-periphery network with bilateral trading costs. The model is calibrated using regulatory data on the entire U.S. credit default swap (CDS) market between 2010 and 2013. Prices depend crucially on the risk-bearing capacity of core dealers, yet unlike standard models featuring a dealer sector, we allow for heterogeneity in dealer risk-bearing capacity. This heterogeneity is quantitatively important. Depending on how well dealers share risk, the exit of a single dealer can cause credit spreads to rise by 8 % to 24%.

Abstract We identify a novel economic mechanism through which passive ownership positively affects informational efficiency in the cross-section of firms. Passive investors’ inelastic demand lowers a firm’s cost-of-capital, inducing it to take more risk. The higher cash flow variance, in turn, incentivizes active investors to acquire more precise private information, pushing up price informativeness for firms with high passive ownership. High passive ownership also implies higher stock prices and higher stock-return variances. An increase in the aggregate size of passive investors amplifies these cross-sectional differences. We also document complementarities in firms’ real investment and investors’ information choices that can cause information crashes. Received May 31, 2020; editorial decision January 4, 2023 by Editor Holger Mueller. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

Abstract Municipal bond markets began pricing sea-level rise (SLR) exposure risk in 2013, coinciding with upward revisions to worst-case SLR projections and accompanying uncertainty around these projections. The effect is larger for long-maturity bonds and not solely driven by near-term flood risk. We use a structural model of credit risk to quantify the implied economic impact and distinguish between the effects of underlying asset values and of uncertainty. The SLR exposure premium exhibits a trend different from house prices and is unaffected by house price controls. Together, our results highlight the importance of climate uncertainty in driving municipal bond prices. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

Abstract We investigate the strategic role of a recommender who cares about accuracy and whose recommendations influence product quality. In the presence of such feedback effects, recommendations have a self-fulling property: the recommendation agent can select any firm that will end up being the firm with the best quality. This produces important inefficiencies that include (a) a lack of incentive to acquire valuable information, (b) a status quo bias, and (c) the avoidance of risky innovations. Monetary payments from firms may work in mitigating these inefficiencies, while competition between recommenders and monetary payments from consumers are ineffective.

Abstract This paper examines how employee earnings respond to a one-time cash flow shock in the form of a government R&D grant. In a regression discontinuity design, we find that the grant immediately increases average annual employee-level earnings by 2.9%. This benefit accrues only to incumbent employees and rises with job tenure. The grant also affects firm growth, but the initial wage patterns do not appear to reflect growth or productivity. Instead, the evidence supports implicit equity financing within the firm, where employees initially accept lower wages from financially constrained firms and earn more when the firm has ability to pay. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract Many financially distressed students who qualify for federal assistance plans with interest moratorium and principal forgiveness instead accrue interest over long periods of nonpayment. This loan mismanagement is associated with higher delinquency. Mismanagement varies significantly across student gender and race: it is more prominent among male and non-white students. Mismanagement also varies across loan servicers, depending on proxies for student-adverse servicer policies. We consider explanations based on student selection and servicer treatment for loan mismanagement. Student financial literacy plays an important role but variation in treatment on the part of loan servicers appears more important. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online