Knowledge that Transforms

We study incentive contracts used by asset management firms in Norway, focusing on how bonus structures impact performance. The incentive contracts in our sample are heterogeneous, with firms rewarding fund managers based on both quantitative and qualitative targets. We find that higher potential bonuses tied to quantitative metrics, such as the information ratio, lead to better risk-adjusted performance at year-end. Managers at risk of missing bonus thresholds attempt to boost performance through portfolio adjustments, but these efforts backfire, resulting in worse outcomes in the latter part of the year.

Payment timeliness is crucial for the efficient functioning of supply chains. This paper examines the impact of extreme weather events on the timeliness of business establishments' payments to their suppliers, with a particular focus on Hurricane Katrina. We find that Katrina caused significant payment delays among affected establishments, with the impact being more severe for establishments whose parent firms were more exposed to Katrina, were financially constrained, or operated in markets with higher supplier competition. Following Katrina, these payment delays were associated with deteriorations in establishments' employment, survival, and exit outcomes, as well as in parent firms' supply-chain relationships and suppliers' financial performance. Our findings demonstrate that physical climate risks can profoundly affect the financial and real outcomes of customer and supplier firms through payment delays.

We study how trade liberalization affects financial and innovation decisions of large firms across major G7 countries. We document how firms increase their cash holdings when their country’s trading partners lower their import tariffs, while we find no effect of a decrease in the country’s own import tariffs. Specifically, we find that the increase in cash holdings occurs before tariff cuts by trading partners and is associated with higher R&D spending and patent filing after the cuts. Our results are consistent with the predictions of a model in which higher expected returns to innovation from enhanced export market access lead to higher cash buffers.

Corporate agility – the ability to respond quickly and effectively to changing business conditions – is crucial for firms' success. While important, this concept is difficult to measure and use in quantitative research. By applying machine learning techniques, we develop reliable measures of agility and analyse how agile firms manage exposure to monetary policy uncertainty, a significant and frequently occurring form of threat. Agile firms' stocks are significantly less exposed to this uncertainty as they proactively apply risk management techniques to reduce their exposure. This has real consequences: agile firms' investments are less affected by monetary policy tightening episodes.

How do banks contribute to the green economy? Using a unique dataset detailing firms' revenue exposure to green business activities, we present new evidence that firms generating revenue from green products and services are associated with lower syndicated loan spreads. We find that the green revenue effects on loan spreads are attributable to firms' prospects tied to climate change-related opportunities and banks' environmental orientation. Foreign banks subject to mandatory environmental, social, and governance (ESG) disclosure regulations reduce the loan spreads to green revenue firms. We also find suggestive evidence that firms with green revenue tend to file more green patents following loan origination. While banks typically perceive green innovation as riskier and demand higher loan spreads, this effect is offset if a firm also generates green revenue. Collectively, our results highlight the pivotal role that banks play in channeling financial resources toward green business practices.