Knowledge that Transforms

China’s Belt and Road Initiative (BRI) aims to create economic corridors encompassing two-thirds of the world’s population and 40% of global GDP. Using the inauguration of a railway tunnel between Europe and Asia as a quasi-natural experiment, I demonstrate that countries gaining access to BRI’s freight routes issue significant amounts of high-yield debt. This debt is largely absorbed domestically, reallocating capital away from firms without translating into infrastructure investment. State-owned enterprises appear insulated from tightening financial conditions. I document mechanisms involving political alignment with China, exposure to trade policy uncertainty, and topographic fit based on historical Orient Express routes.

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Equity returns follow a pronounced V-shape pattern around the onset of recessions. They sharply drop into negative territory just before business cycle peaks and then strongly recover as the recession unfolds. Recessions are typically preceded by a flat yield curve. Probit models relying on the term spread as a predictor therefore time the beginning of recessions well. We show that model-implied recession probabilities based on the term spread strongly improve equity premium prediction in- and out-of-sample and outperform several benchmark predictors. Correcting for a structural break in the mean of the term spread in 1982 further strengthens the forecast performance.

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Using the near universe of online job postings from 2007 to 2021, we construct a firm-level metric of labor market power. We find that firms with higher labor market power tend to have higher financial leverage. Our findings are not driven by product market competition or correlated labor market characteristics. The evidence is less pronounced among firms hiring in occupations with high labor mobility and skill transferability. To establish causality, we exploit the establishment of Amazon HQ2 in Crystal City as a shock to the labor market power of local firms and show consistent findings with our baseline results.

Exploiting an exogenous increase in public awareness of banks’ lending to the gun industry, this article documents significant deposit outflows from gun lenders. These outflows are stronger in Democratic-leaning markets and for Republican-leaning lenders. In contrast, anti-gun lenders experience limited and insignificant outflows, consistent with policy alignment with depositor values. Outflows tighten funding constraints, prompting gun lenders to reduce deposit spreads and branches in Democratic-leaning markets. While large gun lenders remain resilient, small gun lenders significantly reduce their CRA loan volumes. The findings highlight political value misalignment as a driver of depositor behavior and its real effects on bank operations.

We study trading among strategic traders who may incorrectly assess the degree of market crowdedness. These mistakes distort equilibrium strategies and prices. When traders underestimate market crowdedness, they target larger inventories and trade more aggressively, but their actual profits are lower than expected because they underestimate the amount of information already impounded in prices. Crowded markets are prone to abrupt crashes. The magnitude of price dislocations and the speed of recovery during fire-sale events can help infer traders’ beliefs about market crowdedness.

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We administer a theory-driven, lab-in-the-field experiment to study the disposition effect among financial professionals. Our novel design identifies, at the individual participant level, key behavioral drivers of the disposition effect: reference-dependent risk attitudes (“tastes”), second-order uncertainty attitudes (including “ambiguity”), and subjective likelihood assessments (“beliefs”). Among the 237 professionals in our sample, 34% exhibited the disposition effect, which seems to be primarily driven by non-Bayesian beliefs. Our experimental results suggest that, when faced with new information about their asset’s performance, financial professionals failed to update their beliefs sufficiently leading them to sell the asset that gained (lost) value more (less) readily.