Knowledge that Transforms

This study examines how bank risk influences employee wage compensation, disentangling the effects of risk exposure and leverage. Using data from U.S. commercial banks (1990–2022), we find that higher bank risk—measured by earnings volatility, default probability, and credit risk—is associated with higher wages, alongside wage effects linked to monitoring incentives from greater capitalization. This relationship is most pronounced in smaller, less-capitalized banks, under favorable economic conditions, and when bank concentration is low—contexts where employees have greater bargaining power. Overall, bank wages reflect both compensation for job insecurity and monitoring-related incentives, offering insight into employee pay as a signal of bank fragility.

We study the cost of funding channel by investigating how an easing in firms’ external financing cost affects corporate investment. This paper employs ECB’s corporate security purchase program as a quasi-natural experiment that reduces firms’ bond funding costs. Using balance sheet information on non-financial firms in France, we find that firms increase maintenance investment to preserve existing assets, instead of investing in new equipment to grow in scale. Our findings suggest that firms face non-convex costs in adjusting their capital stock and do not smoothly adjust investment following a shock in the cost of capital.

Using a large cross-section of 22 countries, we analyze whether macro risks are spanned by the yield curve. Our tests show that macro information, both first and second moments, provides additional explanatory power for bond excess returns beyond yield factors, contrary to the spanned model implications. However, when considering in-sample fit and term premium predictions, distinguishing between spanned and unspanned term structure models makes no difference. These findings are robust across the cross-section of countries. We find the strongest out-of-sample predictive power for second moments of macro information for long-term emerging market bonds.

Primary dealers are sophisticated investors appointed by sovereign issuers to buy, promote, and distribute sovereign debt that develop a deep knowledge of sovereign debt markets. This study examines domestic primary dealers’ sovereign debt classification, which is presumed to reflect their superior information sets on expected sovereign yields. We hypothesize that when this classification is disclosed in financial statements, peer banks adjust their asset allocation accordingly. We first document the predictive ability of domestic primary dealers’ sovereign debt classification for future sovereign yields. Next, using a sample of 6,437 bank-year observations over the 2012–2019 period and after controlling for publicly available information and other determinants of banks’ asset allocation decisions, we show that peer banks divest financial instruments and increase loans when domestic primary dealers disclose more sovereign debt at amortised cost. These effects are more pronounced among peer banks facing greater informational disadvantages.