Knowledge that Transforms

“Stealth mergers” are not reported to the government because they fall below the required size threshold. We study stealth mergers involving public targets for which manipulation of transaction sizes is unlikely. These stealth mergers result in less R&D spending, patenting, and capital expenditures, and in lower value patents for both acquiring firms and their competitors relative to non-stealth mergers. Industry concentration increases, and product market competition decreases for stealth acquirers. Stealth acquirers and their competitors earn higher cumulative abnormal returns relative to non-stealth mergers. Our results suggest more government scrutiny is warranted for stealth mergers.

We propose a consumption-based model to explain puzzling unstable (i.e., sometimes positive and sometimes negative) relations between stock market variance with both stock market risk premia and prices. In the model, market risk premia depend positively (negatively) on fear (euphoria) variance. Market prices, which decrease with discount rates, correlate negatively (positively) with fear (euphoria) variance. Because it is the sum of fear and euphoria variances, the market variance may correlate positively or negatively with expected returns and prices, depending on the relative importance of the two variances. Our empirical results support the model’s key assumptions and many novel implications.

We find that capital investment and net debt issuance of large firms are, on average, more sensitive to industry business cycles than those of small firms, in stark contrast to the effect of size on investment sensitivity to macroeconomic cycles. We theoretically examine the role of firm size on firms’ responses to industry shocks. Consistent with our theoretical predictions, we find that large firms exhibit greater sensitivity to industry cycles than small firms in their investment and net debt issuance only in industries with low cyclical variability of markups and production growth, high fixed cost intensity, high market-to-book, and high markups.

Using comprehensive account-level data, we separate Chinese retail investors into 5 groups and document strong heterogeneity in trading dynamics and performances. Retail investors with smaller account sizes cannot predict future returns correctly, display daily momentum patterns, fail to process public news, and show overconfidence and gambling preferences, while retail investors with larger account balances predict future returns correctly, display contrarian patterns, and incorporate public news in trading. Using performance measures established in previous literature, we find that smaller retail investors suffer from poor stock selection abilities and trading costs, while large retail investors’ stock selection abilities are offset by trading costs.

We show that the negative relation between real investments and future stock returns is primarily driven by the subsample of firms building additional capacity. We develop a real options model to rationalize that evidence based on the premise that firms need to learn how to best operate modern capacity vintages, inducing idiosyncratic uncertainty in that capacity’s production costs over the learning period. Conversely, the uncertainty lowers the expected return of firms with newly built capacity until it is resolved. Further evidence based on profit sensitivities to aggregate conditions; analyst forecast-error volatilities; and high- versus low-tech industry subsamples supports our uncertainty explanation.

A novel arbitrage-free model of nominal U.S. Treasuries that decomposes yields into frictionless expected rates, frictionless term premiums, and liquidity premiums produces four key results from Jan. 1987 to Aug. 2023. First, liquidity loadings are larger than for the slope and higher-order principal components. Second, the countercyclicality of required nominal Treasury returns owes to liquidity, if anything, not frictionless term premiums. Third, Federal Reserve large-scale asset purchases generally work through expected rates and frictionless term premiums, not liquidity premiums. Fourth, given similar estimates using TIPS, inflation expectations are less moored around the Federal Reserve’s price objectives than other models say.

The credit default swap (CDS) Big Bang introduced 2 standard coupons for CDS trading. We exploit the setting of the 2 standard coupons as a natural experiment to quantify the components of the bid–ask spreads in over-the-counter markets. We find that a significant portion of the difference in the bid–ask spread between the 2 coupons is explained by the difference in funding costs. Furthermore, search intensity also explains the variation in the difference in bid–ask spread. The liquidity typically concentrates on one of the standard coupons and can suddenly switch to the other coupon. Using the sudden switch of the primary coupon, we provide further evidence to support the predictions of search-based liquidity models.

We investigate whether firm-level political connections affect the allocation of exemptions from tariffs imposed on $US 550 billion of Chinese goods imported to the United States annually beginning in 2018. Evidence points to politicians not only rewarding supporters but also punishing opponents: Past campaign contributions to the party controlling (in opposition to) the executive branch increase (decrease) approval likelihood. Our findings point to quid pro quo arrangements between politicians and firms, as opposed to the “information” channel linking political access to regulatory outcomes.

The dissemination of public information regarding an asset’s fundamental value can encourage the acquisition of private information by informed traders, leading to a crowding-in effect. Competing with the crowding-out effect analyzed in prior research, the crowding-in effect shapes the demand for private information in a hump-shaped curve against public information quality. I examine how a for-profit information seller strategically provides information, exploiting this hump-shaped demand curve, and offer theoretical support for the coexistence of free and paid information. The model yields distinctive insights into the equilibrium information structure and market quality when the crowding-in effect drives public information dissemination.

We study how professional fund managers’ growth expectations affect their equity investments and the consequent effects on prices. Using novel data on China’s mutual fund managers’ growth expectations, we show that pessimistic managers decrease equity allocations and shift away from more cyclical stocks. We identify a statistically significant link between managers’ growth expectations and returns on the stocks that they hold and trade. We also find that an earnings-based measure of price informativeness is increasing in forecasting managers’ investment and forecast-consistent trading, implying that active fund managers in China help move stock prices closer to underlying fundamentals.