Knowledge that Transforms

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ABSTRACT Aggregate U.S. bank lending to firms expanded following the outbreak of COVID‐19. Using loan‐level supervisory data, we show that this expansion was driven by draws on credit lines by large firms. Banks that experienced larger credit line drawdowns restricted term lending more, crowding out credit to smaller firms, which reacted by reducing investment. A structural model calibrated to match our empirical results shows that while credit lines increase total bank credit in bad times, they redistribute credit from firms with high propensities to invest to firms with low propensities to invest, exacerbating the decrease in aggregate investment.

ABSTRACT Can banks’ reputational concerns improve the quality of opaque, off‐balance sheet securities, such as mortgage‐backed securities? We study this question in a uniquely parsimonious setting. In the 1760s, Dutch banking partnerships securitized West‐Indian plantation mortgages that were risky and opaque. High‐reputation banks originated better mortgages and issued securities that, on average, retained 17.5% more of their value during a market collapse. Reputational effects are attenuated when the managing partners were married into wealth or received a large share of profits in the short term, suggesting that bank reputation only works if bankers are personally exposed to (long‐run) reputational losses.

ABSTRACT Using confidential supervisory risk ratings, we document that banks increase risk after going public compared to a control group of banks that filed to go public but withdrew their filings for plausibly exogenous reasons. The increase in risk improves short‐term performance at the expense of long‐term performance. We argue that the increase in risk stems from pressure to maximize short‐term stock prices and earnings once the bank is publicly traded. After going public, banks owned by investors that place greater value on short‐term performance increase risk more, and those managed by CEOs with more short‐term compensation also increase risk more.

ABSTRACT We assess the long‐term effects of managerial stress on aging and mortality. Using a difference‐in‐differences design, we apply neural network–based machine‐learning techniques to CEOs' facial images and show that exposure to industry distress shocks during the Great Recession produces visible signs of aging. We estimate a one‐year increase in “apparent” age. Moreover, using data on CEOs since the mid‐1970s, we estimate a 1.1‐year decrease in life expectancy after an industry distress shock, but a two‐year increase when antitakeover laws insulate CEOs from market discipline. The estimated health costs are significant, both in absolute terms and relative to other health risks.

ABSTRACT This paper documents new stylized facts about returns and cashflow growth rates on stocks and housing over decade‐long holding periods. While cashflow growth rates on the two assets comove positively, their returns comove negatively until the Global Financial Crisis and positively thereafter. These facts present a puzzle for representative‐agent models that imply positive return comovement for assets with similar cashflows. I consider a heterogeneous‐agent model with segmented stock and housing markets connected through credit. News about the aggregate economy generates negative return comovement. Recent shifts such as wealthier homebuyers and institutional housing purchases reduce the importance of credit and segmentation.

ABSTRACT Young firms' contribution to aggregate employment has been underwhelming. We show that a similar trend is not apparent, however, in their contribution to aggregate sales or stock market capitalization, implying that these firms have exhibited a high average‐to‐marginal revenue product of labor. We study the implications of a gradual shift in the average‐to‐marginal revenue product of labor within a model of dynamic firm heterogeneity. We show that this shift provides (i) a unified explanation for several aspects of the decline in dynamism and (ii) a possible explanation for why large declines in young‐firm employment may have only a moderate effect on aggregate output and consumption.