Knowledge that Transforms

Firms tend to compete more aggressively when facing financial distress. This intensified competition reduces profit margins, pushing them further into distress and adversely affecting their industry peers. To study such feedback and contagion effects, we incorporate strategic competition in a dynamic model with long‐term defaultable debt, exploring various peer interactions such as predation and price wars. The feedback effect represents a novel source of financial distress costs associated with leverage, which helps explain the negative profitability‐leverage relation across industries. Owing to the contagion effect, firms' optimal leverage is often excessively high from an industry perspective, undermining the industry's financial stability.

We show that bonds issued by financial firms have higher spreads than bonds issued by industrial firms with the same rating and maturity, a difference that we refer to as the financial premium. Over the period 1987 to 2020, in the United States, this premium is 43 basis points on average, with the premium higher for lower ratings, higher during financial crises, and increasing in bond beta. We derive a model that explains the financial premium: banks hold diversified portfolios of nonfinancial debt, and bank debt therefore reflects more systematic risk than nonfinancial debt.

I show that the recent returns to environmental, social, and governance (ESG) investing are strongly driven by price impact from flows toward ESG portfolios. Using data on trades, I estimate the market's ability to accommodate ESG flows, which is given by the elasticity of substitution between ESG and other stocks. I show that every dollar flowing toward a representative ESG portfolio increases the market value of ESG stocks by $0.8. The growing institutional flows into the ESG portfolio are the main driver of ESG returns and have caused an annual flow‐driven return of 1.9%. In the absence of flows, ESG stocks would not have outperformed the market from 2012 to 2023.

When managers revise earnings guidance between earnings announcements, they choose not only what to disclose but also where to disclose—in a standalone release, a guidance call, an investor conference, or an analyst/investor (A/I) day. These venues differ in audience, format, and visibility, raising the question of whether venue choice is a strategic communication decision. In a large sample of unbundled revisions, we find that managers use calls for relatively large negative revisions and when litigation risk is higher and that they use conferences and A/I days for smaller revisions and when analyst disagreement is greater. Textual analysis reveals that calls feature cautious, litigious language for both upward and downward revisions, whereas conference and A/I day communications remain optimistic. In line with these framing differences, calls are associated with amplified reaction to negative news and are followed by more favorable earnings surprises, suggestive of effective expectation management, whereas conferences and A/I days are associated with muted reactions and reduced analyst dispersion and are followed by less favorable surprises. Our findings suggest that venue choice is a dimension of disclosure strategy for managers and an informative signal for investors.

Using news text from The Wall Street Journal and macroeconomic disclosures in 10-K filings, we address the challenge of characterizing both time-varying aggregate risks and firm-level risk exposures. We develop a disclosure-based measure of systematic risk that (1) reveals salient macro risks in each period, (2) provides a text-based estimate of earnings exposure to these risks, and (3) explains the cross-section of stock returns. We also show that macro disclosures are pervasive across the annual report, grow over time, vary with the business cycle, and exhibit within-firm variation, consistent with the time-varying nature of systematic risk exposure. Overall, disclosures yield transparent and economically interpretable estimates of firm-level systematic risk. Data Availability: Data are obtained from SEC filings, Bureau of Economic Analysis, The Wall Street Journal, Compustat, CRSP, I/B/E/S.

We document that the convenience yield of U.S. Treasuries exhibits properties consistent with a hedging perspective of safe assets, that is, Treasuries are valued highly if they appreciate with poor aggregate shocks. In particular, the convenience yield tends to be low when the covariance of Treasury returns with the aggregate stock market returns is high. A decomposition of the aggregate stock‐bond covariance into terms corresponding to the convenience yield, the frictionless risk‐free rate, and default risk reveals that the covariance between stock returns and the convenience yield itself drives the effect in a substantive capacity.

I show how firms optimize the allocation of charitable funds around investments that require external stakeholder support, such as mergers and acquisitions. Acquirers increase donations to target‐related charities before making a takeover offer, but scale funds back after withdrawing from a deal. Firms redistribute funds from nontakeover‐related areas to target insider–affiliated charities, employee communities, and counties with a regulatory presence. Targeted donations that encourage blockholder reciprocity and employee commitment are associated with better deal performance through decreased merger premiums and lower integration costs. Overall, the results highlight firms’ use of philanthropy to manage stakeholder relations in takeover decisions.

To study competition, innovation, and industry dynamics that arise as a result of their interaction, we develop a new oligopolistic general-equilibrium Schumpeterian growth model. This model ties together the endogenous growth, oligopolistic competition, and dynamic industrial organization literatures in a single unified framework. Within each industry, there are an endogenously determined number of large firms (“superstars”) that compete á la Cournot and a continuum of small firms which collectively constitute a competitive fringe. Firms dynamically choose their innovation strategies, cognizant of other firms' choices, and their entry and exit are endogenous. The model is consistent with the macroeconomic trends observed in the United States since the 1970s, such as the domination of industries by a small number of superstar firms, the rise of markups, market concentration, profits, and R&D spending, and the decline in business dynamism, productivity growth, and the labor share. It replicates the empirical relationship between innovation and competition within and across industries. As an application, we estimate the model to disentangle the effects of separate mechanisms on the structural transition observed in the United States, which yields striking results: (1) While the increase in the average markup causes a significant static welfare loss, this loss is overshadowed by the dynamic welfare gains from increased innovation in response to higher profit opportunities. (2) The increasing costs of innovation are found to be the primary determinant of lackluster productivity growth, i.e., ideas are getting harder to find.