Why do banks fund loans embodying considerable borrower-specific information with liquid deposits? I address this question by examining the disciplinary effect of liquid deposits in a framework where banks' production of nontransferable borrower information is explicitly considered. I show that deposit liquidity motivates banks to provide greater monitoring of their loan applicants despite the general lack of observability of bank monitoring and bank loan quality. The analysis provides an important link between the two activities in which banks are viewed as “special”—their liquidity provision through demand deposits and their lending to information-intensive borrowers.Journal of Economic LiteratureClassification Numbers: G21, G28.

In an infinitely repeated version of the Diamond and Dybvig (1983) model, intergenerational transfers enable a bank to achieve interest rate smoothing and to provide depositors with liquidity insurance without Diamond and Dybvig's assumption of no side trades. The bank is subject to runs that may result from either excessive withdrawals or the lack of new deposits. The latter cause, which cannot occur in Diamond and Dybvig's one-generation model, implies that suspension of convertibility may not prevent bank runs. Government intervention may be necessary to maintain bank stability. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

[In an infinitely repeated version of the Diamond and Dybvig (1983) model, intergenerational transfers enable a bank to achieve interest rate smoothing and to provide depositors with liquidity insurance without Diamond and Dybvig's assumption of no side trades. The bank is subject to runs that may result from either excessive withdrawals or the lack of new deposits. The latter cause, which cannot occur in Diamond and Dybvig's one-generation model, implies that suspension of convertibility may not prevent bank runs. Government intervention may be necessary to maintain bank stability.]

In a competitive product market, firms that buy their input have lower profit volatility than they would have if they were to make it. This effect on profit volatility is an important consideration in the firms’ capital structure choices and their make or buy decisions when it interacts with the risk-taking incentive of equityholders of levered firms. Even with a cost advantage enjoyed by a supplier and passed on to its customers, in an industry equilibrium of a priori identical firms, only those that use little or no debt outsource their input to the supplier; all significantly debt-financed firms produce their own input and take advantage of the greater profit volatility resulting from internal production.

Informational scope economies provide a cost advantage to universal banks offering “one‐stop shopping” for lending and underwriting that enables them to “lock in” their clients' subsequent business. This market power reduces universal banks' incentive, relative to that of specialized investment banks, to apply costly underwriting efforts; consequently, universal banks are less successful in selling their clients' securities. Our results suggest that an integrated financial services market is less innovative than one with specialized intermediaries. Our analysis also identifies economy, intermediary, and firm characteristics that motivate either the integration or segmentation of bank lending and underwriting.

We investigate the impact of a new bank tax in Poland on bank lending behavior. We find that banks respond to the tax by tightening credit supply and increasing the costs of credit to the real sector. However, the responses vary across loan segments. In line with search-for-yield behavior, the tax motivates banks to shift their allocations of household credit from low-margin and relatively safe mortgage loans to higher-margin and riskier consumer loans. We find no evidence that financially weak banks are more incentivized to shift to riskier loan types. Moreover, firms that receive loans from banks more exposed to the tax experience a greater credit contraction.

We identify a new mechanism of opportunistic insider trading linked to attention-driven mispricing. Insiders are more likely to sell their company’s stock during periods of heightened retail attention and more inclined to buy when attention diminishes. The results are particularly pronounced for lottery-type stocks and firms with substantial retail ownership. We demonstrate that our findings—which relate to indicators of mispricing, retail order imbalances, and Robinhood herding episodes—extend to seasoned equity issuances and cannot be solely explained by firm fundamentals. Attention-based insider trading is less likely to result in SEC enforcement actions and persists across different regulatory regimes.