Knowledge that Transforms

We examine the effect of personal, two‐way communication on the payment behavior of delinquent borrowers. Borrowers who speak with a randomly assigned bank agent are significantly more likely to successfully resolve the delinquency relative to borrowers who do not speak with a bank agent. Call characteristics related to the human touch of the call, such as the likeability of the agent's voice, significantly affect payment behavior. Borrowers who speak with a bank agent are also significantly less likely to become delinquent again. Our findings highlight the value of a human element in interactions between financial institutions and their customers.

We provide evidence using firm 10‐Ks that over the past 30 years, U.S. firms have expanded their scope of operations. Increases in scope were achieved largely without increasing traditional operating segments. Scope expansion significantly increases valuation and is realized primarily through acquisitions and investment in R&D, but not through capital expenditures. Traditional concentration ratios do not capture this expansion of scope. Our findings point to a new type of firm that increases scope through related expansion, which is highly valued by the market.

This paper makes the first comprehensive attempt to study within‐country heterogeneity of housing returns. We introduce a new city‐level data set covering 15 OECD countries over 150 years and show that national housing markets are characterized by systematic spatial variation in housing returns. Total returns in large agglomerations are close to 100 basis points lower per year than in other parts of the same country. Excess returns outside the large cities can be rationalized as compensation for higher risk, especially higher covariance with income growth and lower liquidity. Real estate in diversified large agglomerations is comparatively safe.

Using account‐level data on millions of U.S. middle‐class investors over 2006 to 2018, we characterize the share of investable wealth that they hold in the stock market over their working lives. Relative to the 1990s, this share has both risen by 10% and become age‐dependent. The Pension Protection Act (PPA)—which allowed target date funds (TDFs) to be default options in retirement plans—played an important role: younger (older) workers starting at a firm after TDFs became the default option post‐PPA invested more (less) in stocks, in line with the TDF glidepath. In contrast, contribution rates changed little following the PPA.

We develop a theory of secured debt, unsecured debt, and debt with anti‐dilution covenants. We assume that, as in practice, covenants convey the right to accelerate if violated, but the new secured debt retains its priority even if issued in violation of covenants. We find that such covenants are nonetheless useful: They provide state‐contingent financing flexibility, balancing over‐ and underinvestment incentives. The optimal debt structure is multilayered, combining secured and unsecured debt with and without covenants. Our results are consistent with observations about debt structure, covenant violations, and waivers. They speak to a policy debate about debt priority.

We build cross‐sections of asset returns for a given set of characteristics, that is, managed portfolios serving as test assets, as well as building blocks for tradable risk factors. We use decision trees to endogenously group similar stocks together by selecting optimal portfolio splits to span the stochastic discount factor, projected on individual stocks. Our portfolios are interpretable and well diversified, reflecting many characteristics and their interactions. Compared to combinations of dozens (even hundreds) of single/double sorts, as well as machine‐learning prediction‐based portfolios, our cross‐sections are low‐dimensional yet have up to three times higher out‐of‐sample Sharpe ratios and alphas.

Using administrative data for 63,000 individuals across 2,500,000 person‐month observations, we find that wealthier individuals have better life insurance coverage, controlling for the value of the asset insured, namely, the consumption needs of dependents. This positive wealth‐insurance correlation, which is surprising given the prevailing view that wealth substitutes for insurance, persists after allowing for wealth‐related differences in risk or bequest preferences, pricing, background risk, education, employment, or liquidity constraints. Our findings call for further investigation of this wealth‐coverage correlation but support theories emphasizing the consumption‐smoothing role of insurance across not only states of the world, but also time.

We model the optimal resolution of insolvent firms in general equilibrium. Collateral‐constrained banks lend to (i) solvent firms to finance investments and (ii) distressed firms to avoid liquidation. Liquidations create negative fire‐sale externalities. Liquidations also relieve bank balance–sheet congestion, enabling new firm loans that generate positive collateral externalities by lowering bank borrowing rates. Socially optimal interventions encourage liquidation when firms have high operating losses, high leverage, or low productivity. Surprisingly, larger fire sales promote interventions encouraging more liquidations. We study synergies between insolvency interventions and macroprudential regulation, bailouts, deferred loss recognition, and debt subordination. Our model elucidates historical crisis interventions.

We model two methods of executing segregated retail orders: brokers' routing, whereby brokers allocate orders using the market maker's overall performance, and order‐by‐order auctions, where market makers bid on individual orders, a recent U.S. Securities and Exchange Commission proposal. Order‐by‐order auctions improve allocative efficiency, but face a winner's curse reducing retail investor welfare, particularly when liquidity is limited. Additional market participants competing for retail orders fail to improve total efficiency and investor welfare when entrants possess information superior to incumbent wholesalers. Our results hold when new entrants are less informed or the information structure differs. We also examine the cross‐subsidization of brokers' routing.

We analyze minute‐by‐minute Bloomberg online status and study how the effort provision of executives in public corporations affects firm value. While executives spend most of their time doing other activities, patterns of Bloomberg usage allow us to characterize their work habits as measures of effort provision. We document a positive effect of effort on unexpected earnings and cumulative abnormal returns following earnings announcements, and a reduction in credit default swap spreads. This is robust to using exogenous weather patterns as an instrument. Long‐short, calendar‐time effort portfolios earn significant average daily returns. Finally, we revisit important agency issues from the literature.