Knowledge that Transforms

We show that productivity at both the firm and employee (i.e., analyst and inventor) level temporarily declines upon announcements of takeover rumors that do not materialize. Such speculative news may hurt productivity because uncertainty and the threat of job loss cause anxiety, distraction, and reduced commitment among employees and managers. Consistently, we observe a more pronounced productivity dip for rumored targets and when the likelihood of job loss is higher. Firm performance mirrors these results. We find no indication of reverse causality. The evidence fosters our understanding of potential real effects of speculative financial news and the costs of takeover threats.

We develop a dynamic model of debt contracts with adverse selection. Entrepreneurs borrow investment goods from lenders to run businesses whose returns depend on entrepreneurial productivity and common productivity. Entrepreneurial productivity is the entrepreneur’s private information, and lenders construct beliefs about entrepreneurial productivity based on the entrepreneur’s business operation history, common productivity history, and the terms of the contract. The model provides insights into the dynamic and cross-sectional relations between firm age and credit risk, persistency of the effects of a productivity shock, cyclical asymmetry of the business cycle, slow recovery after a crisis, and constructive and destructive economic downturns.

We use a novel experiment in China to examine the effects of having a quasi-official investor own a small number of shares on specific firm outcomes. We find that, relative to control firms, pilot firms experience an increase in dissenting votes from independent directors, a reduction in tunneling and earnings management activities, and an improvement in merger performance. Independent directors questioned by the quasi-official shareholder in activism events subsequently lose board seats in the director market. Overall, our results shed light on a new mechanism for enhancing the protection of minority shareholders.

IPO underwriters have an incentive to underprice an IPO when they allocate shares to their affiliated funds. We label this conflict of interest “supernepotism” and we analyze its effect on IPO pricing. Using a regression discontinuity design (RDD) on a novel hand-collected data set, we find that higher allocations to underwriter-affiliated funds cause higher IPO underpricing. Our evidence suggests that supernepotism has monetary costs for issuers.

We examine the effects of a severe climate event on local firms. Our data include 8,218 business credit reports and a detailed survey of 273 businesses in the area affected by Hurricane Harvey. Delinquent credit balances doubled in areas with the worst flooding, although nonflooded areas also had significant credit impairments. Only independent businesses showed signs of distress; subsidiaries of larger firms did not. Firms were largely uninsured and often were denied credit postdisaster. Many funded recovery informally, such as through friends and family. Our findings suggest that several financial frictions compound the challenges posed by a severe climate event.

We show cash windfalls affect the real economy by spurring entrepreneurship. We identify these effects using the Spanish Christmas Lottery, which provides a unique setting as prizes are geographically concentrated and distributed among thousands of households. We find higher start-up entry, job creation, and self-employment in winning regions. Consistent with a financial constraints channel, results are strongest in sectors relying on external finance and regions with limited credit access. Newly created firms are larger, more profitable, and survive longer. For existing firms, however, growth and profitability do not respond to lottery awards, but wages increase due to tighter labor markets.

We examine a link between bond exchange-traded fund (ETF) creation and redemption processes and the underlying bond market liquidity. Using daily creation and redemption data, we find that including a bond in a creation or redemption basket has a favorable impact on the bond’s liquidity for both high-yield and investment-grade markets. The improvement in liquidity persists during times of market stress with this impact being stronger for redemptions than creations. Our results suggest that ETF mispricing arbitrage explains the improvement in bond liquidity. However, we also find evidence that transaction costs and bond inventory management limit the ETF arbitrage.

Using a unique data set of firms listed on China’s Shenzhen Stock Exchange, we show that investors’ corporate site visits convey information about future stock returns. Firms with abnormally frequent investor visits predictably outperform firms with abnormally infrequent investor visits by approximately 70-to-100 basis points per month. This return predictability concentrates on neglected firms with low trading volumes and when investors incur higher travel costs. Abnormally frequent investor visits accompany increased holdings among visiting institutions and predict improvements in firms’ fundamental performance, consistent with institutions using visits to gain an information advantage regarding underpriced firms. The significance of conducting site visits and in-depth research by fund companies is to consistently deliver stable and substantial returns to clients through professional expertise. (Lei Jing, CEO of Harvest Fund Management Co., Ltd., China)

This article examines the pricing of a firm’s carbon risk in the corporate bond market. Contrary to the “carbon risk premium” hypothesis, bonds of more carbon-intensive firms earn significantly lower returns. This effect cannot be explained by a comprehensive list of bond characteristics and exposure to known risk factors. Investigating sources of the low carbon alpha, we find the underperformance of bonds issued by carbon-intensive firms cannot be fully explained by divestment from institutional investors. Instead, our evidence is most consistent with investor underreaction to the predictability of carbon intensity for firm cash-flow news, creditworthiness, and environmental incidents.

This article shows that changes in the tone of central bank communication have a significant effect on asset prices. Tone captures how the central bank frames economic fundamentals and its monetary policy. A positive tone surprise is associated with increases in stock prices and interest rates, whereas credit spreads and volatility risk premia decrease. These tone effects are robust to controlling for policy actions as well as for conventional measures of monetary policy shocks. Our results suggest that communication tone is a powerful instrument of monetary policy, which affects risk premia embedded in asset prices.