Knowledge that Transforms

Delegating high-stakes decisions creates a fundamental tension: incentivizing experts to acquire unobservable information inevitably distorts their final choices. In a principal-agent setting, we characterize the optimal compensation contract under hidden learning, showing it endogenously generates either contrarian or conformist bias. The direction of this bias depends on learning costs and the precision of public and private information. Our framework links information acquisition incentives to systematic biases in experts’ choices and offers a unifying explanation for conflicting empirical evidence in financial advice: why analysts issue excessive contrarian recommendations, and why inexperienced analysts follow the consensus more than their experienced peers.

Nonbank financial intermediaries (NBFIs) have grown significantly relative to banks. We argue that this growth reflects a transformation of the activities and risks of banks and NBFIs, driven at least in part by changes in bank regulation. We document through new regulatory data, case studies, and empirical analyses that banks remain special as providers of both routine and emergency liquidity to NBFIs and that the sectors have become increasingly interdependent. We discuss some potential regulatory responses, including considering the two sectors holistically and exploring new ways to internalize the costs of systemic risk arising from bank-NBFI interconnectedness.

We examine the influence of consultants on the portfolio choices and performance of institutional asset owners’ private equity (PE) investments. We find that asset owners using the same search consultant make similar investment choices. Asset owners advised by consultants that focus on a narrower list of PE managers perform better. Among asset owners that share a consultant, those with the largest PE mandates (top clients) end up with better-performing investments. For mechanisms underlying consultants’ performance impact, we find evidence for both access and selection abilities.

We examine how firms are affected by the political bargaining power of their headquarters’ region. Exploiting variation in the strategic importance of swing states stemming from shifting partisan balance in the U.S. Senate, we find that corporate valuations and investments positively respond to increases in regional political influence. We verify the valuation findings using an event study based on the 2021 Georgia runoff election that unexpectedly produced a 50-50 balance in the Senate. We investigate potential policy mechanisms and find that tax incentives constitute the most likely channel through which firms benefit from the political bargaining power of their headquarters’ region.

We study a nonlinear relationship between corporate investment and Tobin’s q in the cross section of firms. After correcting for nonlinear errors using a repeated measurement of q derived from analysts’ forecasts, we find evidence of varying investment-q sensitivity across firms. The investment-q sensitivity is low for firms with low q. It then becomes more pronounced at intermediate values before weakening at high values of q, resulting in an S-shaped pattern. In the cross section, the true investment-q relation is therefore not strictly linear. Firm investment is predicted to remain similar among firms with low q, suggesting that increases in q do not necessarily lead firms to increase investment significantly.

We study how firms can design their organizational structures to overcome dynamic commitment problems when entering new markets. A manager exerts costly effort to first develop and subsequently manage an investment opportunity. Ex post, the firm underinvests in projects that generate high management rents. However, the prospect of those rents helps offset the manager’s initial project development cost, making ex ante commitment to invest optimal. Levered subsidiaries mitigate this time-consistency problem by introducing risk-shifting incentives that counteract underinvestment. Subsidiaries are most valuable for projects that are costly to develop, have moderate management costs, and yield returns uncorrelated with existing business.

The presence of shadow banks in corporate term loan syndicates adversely affects credit lines’ liquidity provision, despite shadow banks not directly funding credit lines. Within the same syndicated loan deal, shadow banks attract not only riskier borrowers but also fewer banks as co-lenders, both in the term loan and in the credit line. Furthermore, credit lines in deals funded by shadow banks, compared to those without shadow bank participation, are smaller, with shorter maturities, and lower drawdown rates. Overall, our results highlight that syndicated loan deals with a strong presence of shadow banks offer borrowers lower liquidity protection. JEL G21, G22, G23

Using granular data on global investment funds in difference-in-differences regressions around the announcement of the U.S. Inflation Reduction Act (IRA), we identify a novel international spillover channel of green industrial policies. Sustainable global investment funds received more inflows with the act announcement, in turn increasing their cross-border portfolio investments worldwide. Recipient economies better prepared to address climate change benefited most from sustainable global funds’ additional investments. Our results are stronger for funds with a larger portfolio share invested in the United States and in IRA-targeted industries. Yet, we see strong international spillovers even for non-U.S.-domiciled sustainable funds investing entirely outside the United States. Thus, global investment funds have become an important conduit for the international spillover of climate policies.

Using a data set of public procurement auctions and registered shareholders of all bidding firms in Singapore, we study the effects of ownership networks on prices and efficiency in product markets. We find participating bidders with common owners or common owners’ owners are more likely to submit identical bids, and the identical bids are associated with higher contract prices. Our structural estimates suggest removing ownership network effects improves a procurer’s cost efficiency. Our findings are robust to falsification tests, bid rounding concerns, placebo tests using other common stakeholder relationships, and weighting based on a machine-learning prediction of the auction format.

We model credibility challenges financial regulators often face when disclosing bank stress test results. Since disclosures influence banks’ risk-taking and depositors’ withdrawal decisions, regulators may have incentives to misreport. We show that regulators can reveal results credibly through imprecise disclosures to both banks and depositors. The regulator reveals only the range or the interval in which the result lies. Crucially, our findings indicate that stress test results can be disclosed credibly without assuming that the regulator is committed to truthful disclosure.