Knowledge that Transforms

This paper develops an empirical methodology for extracting pricing factors from investor portfolio data. We apply this approach to the stockholdings of Norwegian individual investors from 1997 to 2017. A two‐factor model, featuring the market portfolio and a long‐short portfolio constructed from the holdings of investors sorted by age or wealth, explains both the common variation in portfolio holdings and the cross section of stock returns. Portfolio tilts toward the long‐short investor factor correlate with indebtedness, macroeconomic exposure, gender, and investment experience. Our paper illustrates the benefits of using holdings data for explaining the risk premia of financial assets.

We examine executive compensation in a general equilibrium model with dynamic moral hazard, where executives' outside options are endogenously determined by equilibrium market compensation. Firms provide incentives through compensation packages featuring deferred payments as “carrots” and termination as “sticks.” Crucially, the effectiveness of termination as an incentive device is undermined by the outside options available to executives. As individual firms fail to internalize the effect of their compensation design on these endogenous outside options, the equilibrium is generally inefficient. Compared to shareholder‐value‐maximizing compensation packages, executives are paid too much, too soon, and keep their jobs for too long.

Using international data, we quantify the magnitude of survivorship bias in U.S. equity market performance, finding that it explains about one‐third of the equity risk premium in the past century. We model the subjective crash belief of an investor who infers the crash risk in the United States by cross‐learning from other countries. The U.S. crash probability shows a persistent and widening divergence from the implied global average. We attribute the upward bias in the measured equity premium to crashes that did not occur in‐sample and to shocks to valuations resulting from learning about the probability.

Focusing on the one‐off tax gains and losses (i.e., windfalls) associated with the 2017 Tax Cuts and Jobs Act, we reexamine whether CEOs are rewarded for luck. We find that weakly monitored CEOs are compensated for the windfall tax gains but not penalized for the corresponding tax losses. No such pattern is observed for CEOs facing greater pay scrutiny. The pay for windfalls cannot be explained as rewards for CEOs’ efforts, talents, political activities, or as firms sharing their tax gains with all executives. The results are more consistent with rent extraction by CEOs facing weak pay scrutiny.

Persuasive communication functions through not only content but also delivery—facial expression, tone of voice, and diction. This paper examines the persuasiveness of delivery in startup pitches. Using machine learning algorithms to process full pitch videos, we quantify persuasion in visual, vocal, and verbal dimensions. We find that positive (i.e., passionate, warm) pitches increase funding probability. However, conditional on funding, startups with higher levels of pitch positivity underperform. Women are more heavily judged on delivery when evaluated in single‐gender teams, but they are neglected when copitching in mixed‐gender teams. Using an experiment, we show that persuasion delivery works mainly through leading investors to form inaccurate beliefs.

The pricing of carbon transition risk is central to the debate on climate‐aware investments. Emissions are tightly linked to sales and are available to investors only with significant lags. The positive carbon return, or brown‐minus‐green return differential, documented in previous studies arises from forward‐looking firm performance information contained in emissions rather than a risk premium in ex ante expected returns. After accounting for the data release lag, carbon returns turn negative in the United States and insignificant globally. Developed markets experience lower carbon returns due to intense climate concern shocks, while countries with stringent climate policies exhibit higher carbon returns.

The aggregate leverage of broker‐dealers responds to demand and supply disturbances that have opposite effects on financial markets. Specifically, leverage supply shocks that relax broker‐dealers' funding constraints increase leverage, liquidity, and returns and carry a positive price of risk, while leverage demand shocks also increase leverage but reduce liquidity and returns and carry a negative price of risk. Disentangling demand‐ and supply‐like shocks resolves existing puzzles around the price of leverage risk and yields consistent evidence across many markets of a central role for intermediation frictions and dealers' aggregate leverage in asset pricing.

Theory posits that when managers anticipate excess capacity, average q becomes a biased estimator of marginal q as the potential for underutilizing new capital reduces the marginal benefit of investing. After correcting for this source of measurement error, the explanatory power of Tobin's q substantially improves in time‐series and cross‐sectional regressions as well as in out‐of‐sample tests. These findings, together with a secular erosion in capacity utilization, help explain why corporate investment rates have been declining for decades despite average q increasing significantly. Our analysis indicates that economic rigidities have contributed to the persistent erosion in capacity utilization.

We build an arbitrage‐based model of the yield curves in a heterogeneous monetary union with sovereign default risk, which accounts for the asymmetric shifts in euro‐area yields during the Covid‐19 pandemic. We derive an affine term structure solution, and decompose yields into expectations, term premium, expected default loss, and credit risk premium components. In an extension, we endogenize the peripheral default probability, showing that it decreases with central bank bond holdings. Calibrating the model to Germany and Italy, we show that both the level and the shifts in the sovereign spread are mainly attributable to the credit risk premium.

Using contract‐level data for the Canadian mortgage market, this paper provides evidence of an “invest‐and‐harvest” pricing pattern. We build a dynamic model of price negotiation with search and switching frictions to capture key market features. We estimate the model and use it to investigate the effects of market frictions and the resulting dynamic competition on borrowers' and banks' payoffs. We show that dynamic pricing and the presence of search and switching costs have important implications for public policies.