Knowledge that Transforms

Abstract We study investor disagreement within conversations rather than across independent messages. Using Reddit’s r/wallstreetbets (WSB), we classify the disagreement of each comment toward its parent using a large language model and aggregate the signed disagreement scores at the ticker-day level by conversational depth. Disagreement does not diminish as discussions deepen, and later conversational stages can remain highly polarized. Contrary to the predictions of common prior models, successive rounds of discussion do not drive investors toward consensus. Relevance to market outcomes, however, concentrates in first-round replies. Depth-1 conversational disagreement predicts retail trading volume most robustly in meme stocks from the 2021 retail-trading episode, with effects persisting from the day of the post through subsequent trading days. In the broader cross-section of stocks discussed on WSB, the same association appears contemporaneously but weakens at longer horizons. Discussions that are deeper in the thread are uninformative about trading outcomes. (JEL G10, G12, G41, C55)

Abstract While firms manage their capital structure to target credit ratings, how targeting impacts capital structure decisions is not well understood. We hypothesize that firms engage in ratings cushioning by preserving a leverage buffer against rating downgrades. We show that ratings cushions are sizable in magnitude. Following plausibly exogenous increases in cushion, firms increase leverage to consume their newfound cushion particularly when they have attractive investment opportunities and are less exposed to earnings shocks. These findings suggest that ratings cushioning restrains firms from pursuing otherwise more aggressive capital structure and investment choices. (JEL G31, G32)

Abstract As nonbanks’ market share increases in a local residential mortgage market, the quality of their postorigination mortgage servicing improves. This finding is confirmed by two instrumental variable analyses exploiting (1) stress tests conducted by the Federal Reserve, and (2) mortgage industry surety bonds required by each state. Evidence suggests that improvements in service quality arise through two channels. First, expansion in nonbank market share leads to greater lender specialization: nonbanks increasingly service lower-income borrowers, while traditional banks increasingly concentrate on higher-income segments. Second, higher nonbank market share is associated with increased investment in technology by nonbanks. (JEL G21, G23, L13, L15)Received: May 22, 2025

Abstract Delegating high-stakes decisions creates a fundamental tension: incentivizing experts to acquire unobservable information inevitably distorts their final choices. In a principal-agent setting, we characterize the optimal compensation contract under hidden learning, showing it endogenously generates either contrarian or conformist bias. The direction of this bias depends on learning costs and the precision of public and private information. Our framework links information acquisition incentives to systematic biases in experts’ choices and offers a unifying explanation for conflicting empirical evidence in financial advice: why analysts issue excessive contrarian recommendations, and why inexperienced analysts follow the consensus more than their experienced peers. (JEL D82, D83, G24)

Abstract Nonbank financial intermediaries (NBFIs) have grown significantly relative to banks. We argue that this growth reflects a transformation of the activities and risks of banks and NBFIs, driven at least in part by changes in bank regulation. We document through new regulatory data, case studies, and empirical analyses that banks remain special as providers of both routine and emergency liquidity to NBFIs and that the sectors have become increasingly interdependent. We discuss some potential regulatory responses, including considering the two sectors holistically and exploring new ways to internalize the costs of systemic risk arising from bank-NBFI interconnectedness. (JEL: G01, G21, G23, G28)

Abstract We examine the influence of consultants on the portfolio choices and performance of institutional asset owners’ private equity (PE) investments. We find that asset owners using the same search consultant make similar investment choices. Asset owners advised by consultants that focus on a narrower list of PE managers perform better. Among asset owners that share a consultant, those with the largest PE mandates (top clients) end up with better-performing investments. For mechanisms underlying consultants’ performance impact, we find evidence for both access and selection abilities. (JEL G11, G20, G23)

Abstract We examine how firms are affected by the political bargaining power of their headquarters’ region. Exploiting variation in the strategic importance of swing states stemming from shifting partisan balance in the U.S. Senate, we find that corporate valuations and investments positively respond to increases in regional political influence. We verify the valuation findings using an event study based on the 2021 Georgia runoff election that unexpectedly produced a 50-50 balance in the Senate. We investigate potential policy mechanisms and find that tax incentives constitute the most likely channel through which firms benefit from the political bargaining power of their headquarters’ region.

Abstract We study a nonlinear relationship between corporate investment and Tobin’s q in the cross section of firms. After correcting for nonlinear errors using a repeated measurement of q derived from analysts’ forecasts, we find evidence of varying investment-q sensitivity across firms. The investment-q sensitivity is low for firms with low q. It then becomes more pronounced at intermediate values before weakening at high values of q, resulting in an S-shaped pattern. In the cross section, the true investment-q relation is therefore not strictly linear. Firm investment is predicted to remain similar among firms with low q, suggesting that increases in q do not necessarily lead firms to increase investment significantly. (JEL C21, C26, E22, G31)

Abstract We study how firms can design their organizational structures to overcome dynamic commitment problems when entering new markets. A manager exerts costly effort to first develop and subsequently manage an investment opportunity. Ex post, the firm underinvests in projects that generate high management rents. However, the prospect of those rents helps offset the manager’s initial project development cost, making ex ante commitment to invest optimal. Levered subsidiaries mitigate this time-consistency problem by introducing risk-shifting incentives that counteract underinvestment. Subsidiaries are most valuable for projects that are costly to develop, have moderate management costs, and yield returns uncorrelated with existing business. (JEL G32, G34, L22)

Abstract The presence of shadow banks in corporate term loan syndicates adversely affects credit lines’ liquidity provision, despite shadow banks not directly funding credit lines. Within the same syndicated loan deal, shadow banks attract not only riskier borrowers but also fewer banks as co-lenders, both in the term loan and in the credit line. Furthermore, credit lines in deals funded by shadow banks, compared to those without shadow bank participation, are smaller, with shorter maturities, and lower drawdown rates. Overall, our results highlight that syndicated loan deals with a strong presence of shadow banks offer borrowers lower liquidity protection. JEL G21, G22, G23