Knowledge that Transforms

In this study, we assess capabilities of different types of banks to cater to the financial needs of small and medium-sized enterprises (SMEs). Using a comprehensive dataset from an emerging economy, including the information on local banks’ corrective programs, we find that local banks remain difficult-to-replace lenders for SMEs. We show that presence of healthy local banks in an SME's vicinity immunizes the SME against the deterioration of access to bank financing linked to other local banks’ corrective programs. In contrast, large banks are unable to replace the lost lending from local competitors under corrective programs.

We find no evidence of monthly return reversals for the top quintile of small- and large-cap stocks ranked by turnover. Indeed, stocks in the top decile of turnover display short-term momentum. We argue that these findings arise from a combination of effects. First, short-term reversals stem from short-term liquidity demands. Second, news-driven returns tend to continue rather than reverse. Third, turnover acts as a proxy for both liquidity and news-driven trading activity. The evidence suggests that reversals give way to momentum as turnover increases because high-turnover stocks are more liquid than low-turnover stocks and their returns are more reflective of news-driven trading activity. For example, the correlation between the monthly returns of stocks that announce earnings during the month and their announcement-window returns increases with monthly turnover. Furthermore, sorting stocks into turnover-based portfolios that are rebalanced monthly leads to a disproportionate number of stocks with earnings announcements in the high-turnover portfolios.

We investigate the effects of subsidized loans on the real activity of small firms. Despite the lack of theoretical consensus, subsidized loans have been considered or used in many countries after the global financial crisis and during the COVID-19 crisis to alleviate the external financing constraints and stimulate the real activity of small firms. We provide empirical evidence on this policy tool by studying the impact of a large-scale subsidized loan program implemented in Hungary in 2013. Utilizing comprehensive credit registry and firm microdata, we find that subsidized loans were not only highly effective at promoting investment and job creation, but they also enhanced the productive efficiency of firms over time. Meanwhile, there was significant heterogeneity both in the benefits from and access to subsidized loans. While firms with better bank relationships received more subsidized loans, firms with lower net working capital and more severe credit constraints responded more strongly to them, which raises allocation considerations.

This paper defines asymptotic marginal expected shortfall (AMES) for banks within a financial system and provides corresponding estimation method based on multivariate extreme value theory. The estimation method does not assume a specific dependence structure among bank equity returns. Both theoretical AMES and the estimator possess additive property and thus can serve as a tool to allocate system-wide risk to individual institutions. We apply the AMES to 30 global systemically important financial institutions (G-SIFIs). We show that the AMES outperforms the MES in predicting extreme losses during extreme systemic events. By taking the AMES as the reference point for allocating systemic risk to individual institutions, we show that an allocation according to simple bank characteristics such as size and individual risk can be imperfect. The allocation unfairness of individual risk or size across all the G-SIFIs has increased since 2008.

The well-known equity home bias has two components: an extensive and intensive margin. Using data on direct stock holdings of U.S. households, we find that the decision to participate in foreign stock markets depends on investor wealth, with richer investors more likely to participate (the extensive margin). We document a new finding: as investor wealth increases, the portfolio share invested in foreign equities tends to decrease (the intensive margin). A noisy rational expectations equilibrium model with wealth heterogeneity, entry costs, and endogenously chosen information processing capacity can generate the new negative relationship and help understand the U.S. household equity home bias along both margins.

This paper examines the impact of risk-sensitive Basel regulations on debt financing of firms around the world. It investigates how firms cope with the impact through adjustments to their financing sources and capital investments. We find that the implementation of Basel II regulations is associated with reduced credit availability for lower-rated firms. Such firms mitigate the shortage in bank credit through increased reliance on accounts payable, lower payouts to shareholders, and reduced capital investments. The impact of the capital regulation is lower in countries that rely on the internal ratings-based approach. The key results are robust to controls for banking crises, bank-specific controls, and the inclusion of loan-level information. The findings of this paper substantially contribute to the understanding of the real effects of risk-sensitive bank capital regulations.

We document the heterogeneous effects of turnover on mutual fund performance, which help explain the weak cross-sectional turnover-performance relations reported in existing studies. For funds skilled in exploiting short-term investment opportunities, there is a positive empirical relation between turnover and performance. For unskilled funds, the relation turns negative. As a result, performance persistence is stronger among funds with higher turnover. Further, we find that the heterogeneous effects of turnover on performance are not driven by liquidity premium or trade execution skills, but rather due to substantial dispersion in short-term stock selection information.

During an IPO offering, issuers may revise both the offer price and quantity (number of shares). These revisions are of comparable magnitude and are nearly uncorrelated. We show theoretically that these two revisions should be interpreted differently. Shocks to growth options induce price and quantity to move together, whereas shocks to assets-in-place induce movements in opposing directions. Using public shocks that proxy for these two shocks, we find evidence of the predicted comovements. Post-IPO investment behavior is predicted by these revisions in a manner consistent with our model. Unexpected investment is positively associated with both price and quantity revisions, but only when the revisions are aligned. Viewed jointly, price and quantity revisions disentangle the nature of information received during the offering.

Using a comprehensive dataset of orders and trades in the Indian government bond market, this study presents new evidence on the effect of funding liquidity on market liquidity. We find no evidence that lower short-term interest rates – the key instruments of monetary policy – boost market liquidity. However, consistent with models that stress the role of intermediary capital, we find that market liquidity measures have a strong, positive association with short-term borrowing by primary dealers. We provide additional evidence linking these firms’ borrowing to their balance sheet strength and secondary market participation. The results suggest that localized funding conditions specific to marginal suppliers of intermediation services are more important for market liquidity than the broader economy-wide funding environment.