Knowledge that Transforms

We propose a novel approach to synthesize presumably information-driven insider trading signals for the cross section of stocks. We find that the resulting straightforward composite strategy can often forecast returns in a global sample. This predictability is strongest in equal-weighted portfolios, short holding periods, and insider-buying signals, and it improves further with global diversification. Cross-country analysis reveals that varying insider trading restrictions between countries have limited explanatory power for the performance of the composite strategy. Overall, the results are consistent with a short-term informational advantage of insiders, which might be due to the skillful interpretation of non-private news.

We examine how domestic product market competition shapes firms’ foreign market expansion. Using a panel of U.S. public firms from 1997 to 2017 and text-based measures of output offshoring, we show that stronger domestic competition increases foreign sales activity. To address endogeneity concerns, we exploit the competitive effects of policy-induced variation from staggered rejections of the Inevitable Disclosure Doctrine. Further tests indicate that these labor mobility shocks that intensify competitive pressure spur foreign expansion primarily among firms with stronger intangible and organizational capabilities and higher profitability. The findings suggest that domestic competition is an important driver of foreign market expansion.

We measure flow diversification in mutual funds using the cross-sectional correlation of daily flows across investor clienteles. Greater flow diversification is associated with lower future flow volatility, smaller subsequent outflows, and lower cash holdings. We decompose flow correlation into predictable and unexpected components. Unexpectedly low flow correlation is associated with higher post-outflow fund returns, mitigating outflow-induced externalities on incumbent shareholders. Flow diversification also dampens the higher flow-performance sensitivity of illiquid funds, partially offsetting strategic complementarities that can generate fragility.

We find that the effect of political connections on tax planning depends on firms’ financial conditions. After increased political connections, financially unconstrained firms increase tax planning and spending on tax services, as documented in prior studies, whereas constrained firms decrease tax planning and spending on tax services. Moreover, decreases in tax planning are only present for constrained firms that obtain new bank loans and public debt and when the connected politicians serve on banking-related committees. Our results suggest that by facilitating access to external financing, political connections reduce financially constrained firms’ use of tax planning as an internal financing tool.

We examine whether and how firms use connected social media outlets to counteract negative coverage in traditional media. Employing a sample of Chinese listed firms with ties to social media outlets, we find that connected outlets portray firms more favorably than unconnected ones. Following unfavorable coverage in traditional media, connected outlets shift attention toward long-term prospects and promote favorable narratives, consistent with an optimism-shifting mechanism. The effect is more pronounced when firms have stronger incentives to stabilize stock prices and when managers face heightened career concerns. Our findings highlight the role of connected social media outlets in shaping corporate narratives.

We examine the effect of private equity buyouts on the environmental performance of U.S. fossil fuel power plants. Output-scaled CO 2 emissions are, on average, 4.2% lower after buyouts, predominantly because of fuel-saving improvements in production efficiency. Emission intensities decline more significantly following buyouts backed by pro-ESG private equity because of not only greater efficiency gains but also enhanced emission control. Our results suggest that while private equity firms are effective at implementing environmentally beneficial operational changes that also increase profitability, they do not have strong incentives to undertake environmentally beneficial changes that are privately costly, except for those with pro-ESG preferences.

Mutual fund families increasingly outsource the portfolio management task to external advisors. The high-powered incentive contract offered to external advisors, presumably an optimal outcome, implicitly creates convexity in their payoff. We provide causal evidence that this convexity makes the conditional portfolio choice of outsourced mutual funds about twice as risky as in-house funds, which leads to their underperformance. However, fund families can curb excessive risk-shifting unconditionally by: invoking the reputation of external advisor(s) when marketing the fund (co-branding) and hiring geographically proximate external advisors (co-location). Hiring multiple external advisors simultaneously (co-management) is also effective, specifically when underperforming.

Sovereign credit default swaps spreads price the credit risk embedded in government borrowing. We ask how macroeconomic fundamentals predict that risk, and whether a linear mapping from fundamentals to spreads is adequate. Across a large panel of OECD economies, linear methods perform well across countries but lose predictive accuracy after 2022 and fail to capture how spreads vary across maturities. Nonlinear methods recover both. While linear forecasts mainly rely on fiscal ratios, nonlinear predictions draw on the term-structure slope throughout, inflation during the 2022–2024 monetary tightening, and consumer confidence during the Eurozone crisis. These predictive relationships hold panel-wide rather than country-by-country.

We provide novel international evidence that inflation is positively associated with corporate credit risk on average. A 1-standard-deviation increase in inflation is associated with a 21-basis-point increase in next-year credit default swap spreads. Importantly, this relationship is convex: it is negative or weak at low inflation levels but much more positive in high-inflation environments. The positive relation between inflation and credit risk is stronger for firms with greater refinancing vulnerability and more rigid operating cash flows, and in countries with more inflation-responsive monetary regimes and weaker institutional environments. Our findings are consistent with opposing roles for debt rigidity and operating rigidity.

An abstract is not available for this content so a preview has been provided. Please use the Get access link above for information on how to access this content.