Knowledge that Transforms

Government regulations on housing flippers target their high capital gains but ignore their risk-sharing function: rational arbitrageurs reduce market return volatility borne by other participants while undertaking high idiosyncratic risk. Regulations that tighten the limits of arbitrage in housing markets can adversely affect market efficiency by blocking this risk-sharing function. Using comprehensive housing transaction records in Hong Kong from 1993 to 2021, we find although flippers obtain higher annual capital gain returns than long-term buyers by 8.76 percentage points, they undertake substantially higher idiosyncratic risk due to its unique downward-sloping term structure. Only experienced flippers, who have at least two prior purchase experiences and constitute less than 20% of the flippers, outperform long-term buyers in risk-adjusted returns. Following the enactment of an anti-speculation policy that decreases the share of flippers by 14.2 percentage points in one year, the market return volatility of the entire housing market increases by 21.9%.

• Loan interest rates increase by 13.6 basis points when lenders engage a top-tier law firm • The effect of top-tier law firms is stronger when borrowers have weak bargaining power • The effect of top-tier law firms decreases when there are more lead banks in the syndicate • Lenders engaging top-tier law firms charge higher fees and require stricter loan terms We document that top-tier law firms have a material impact on the pricing and structure of syndicated loan contracts. When lead banks engage a top-tier law firm, loan interest rates increase by 13.6 basis points, but this spread premium disappears if the borrower also uses a top-tier law firm. Our results are robust to alternative proxies for top-tier law firms and endogeneity treatment. Top-tier law firms’ ability to increase loan spreads to benefit lenders is more pronounced when borrowers have relatively weak bargaining power, and when the syndicate involves fewer lead banks. We observe that loans with top-tier law firms tend to have shorter deal completion times. In addition, lenders who engage top-tier law firms often charge higher fees and are more likely to require collateral and stricter covenants in their loan contracts. Overall, our evidence suggests top-tier law firms act in the best interest of lender clients, enabling them to negotiate more favorable pricing and terms in private debt agreements.

• Election periods are associated with heightened systemic risk by 3.57%. • Systemic risk declines pre-election in scheduled/end-of-term elections. • Post-election risk is persistent: peaks at 6 months, lasts up to a year. • Stronger effects in snap elections and when the incumbent is not re-elected. • Macroprudential policy partially buffers election-induced instability. We examine whether election periods are associated with systemic risk. Our sample comprises banks from 22 OECD economies over the period 2000 to 2023, and covers 147 national elections. The findings indicate that systemic risk increases during election and post-election periods, while it is reduced in the pre-election period in the case of end-of-term elections. More specifically, the year in which elections occur is associated with a 3.57% higher systemic risk relative to the overall average. The results can be attributed to the suppression of negative information and expansionary fiscal policies in the period before elections. Notably, the impact is more pronounced for snap elections and when the incumbent government is not re-elected. The effect is also stronger in common-law countries, where more market-based financial systems transmit political shocks more rapidly than in civil-law jurisdictions. In addition, we find that macroprudential policies, strong economic growth, trust in the current government and banks’ financial health can partially mitigate the impact of elections on systemic risk. Finally, to alleviate endogeneity concerns, we employ two instrumental variables, namely, term limits and an election uncertainty index based on Google Trends and the results hold and confirm our previous findings, further validating the robustness of our analysis.