We examine the consistency of several prominent multifactor models from the empirical asset pricing literature with the arbitrage pricing theory (APT) framework. We follow the APT-related literature and estimate the common factor structure from a rich cross-section (associated with 42 major CAPM anomalies) by employing the asymptotic principal components method. Our benchmark model contains six statistical factors and clearly dominates, in both economic and statistical terms, most of the empirical multifactor models proposed in the literature by a good margin. These results represent a critical challenge to the current workhorse models in terms of explaining large-scale equity risk premiums. (JEL G10, G12) Received December 27, 2019; editorial decision October 20, 2020 by Editor Thierry Foucault.

Firms rely on patenting and trade secrecy to protect their intellectual property. We study how changes in the trade-off between patenting and secrecy affect firms’ stock liquidity and financing outcomes. We show that an international trade agreement (TRIPS) that strengthened patent protection led to a 10.2% increase in patenting, accompanied by a 14.0%–27.1% improvement in stock liquidity for firms in patent-reliant industries. This in turn allows the affected firms to increase equity financing by 1.9% and reduce leverage by 5.9%. Our results suggest that policies that promote use of patenting over secrecy can reduce informational frictions in equity markets.

We use a new data set on macroprudential foreign exchange (FX) regulations to evaluate their effectiveness and unintended consequences. Our results support the predictions of a model in which banks and markets lend in different currencies, but only banks can screen firm productivity. Regulations significantly reduce bank FX borrowing, and firms respond by increasing FX debt issuance. Moreover, regulations reduce bank sensitivity to exchange rates but are less effective at reducing the sensitivity of the broader economy. Therefore, FX regulations mitigate bank vulnerability to currency fluctuations and the global financial cycle, but appear to partially shift the snowbanks of vulnerability elsewhere.