Knowledge that Transforms

We develop a method that identifies the attention paid by earnings call participants to firms' climate change exposures. The method adapts a machine learning keyword discovery algorithm and captures exposures related to opportunity, physical, and regulatory shocks associated with climate change. The measures are available for more than 10,000 firms from 34 countries between 2002 and 2020. We show that the measures are useful in predicting important real outcomes related to the net‐zero transition, in particular, job creation in disruptive green technologies and green patenting, and that they contain information that is priced in options and equity markets.

Municipal bonds exhibit considerable retail pricing variation, even for same‐size trades of the same bond on the same day, and even from the same dealer. Markups vary widely across dealers. Trading strongly clusters on eighth price increments, and clustered trades exhibit higher markups. Yields are often lowered to just above salient numbers. Machine learning estimates exploiting the richness of the data show that dealers that use strategic pricing have systematically higher markups. Recent Municipal Securities Rulemaking Board rules have had only a limited impact on markups. While a subset of dealers focus on best execution, many dealers appear focused on opportunistic pricing.

This paper shows that securities with nonlinear payoff designs can foster household risk‐taking. We demonstrate this effect by exploiting the introduction of capital guarantee products in Sweden between 2002 and 2007. Their fast and broad adoption is associated with an increase in expected financial portfolio returns. The effect is especially strong for households with low‐risk appetite ex ante. These empirical facts are consistent with a life‐cycle model in which households have pessimistic beliefs or preferences combining loss aversion and narrow framing. Our results illustrate how security design can mitigate behavioral biases to increase mean household portfolio returns.

We show theoretically that variable production costs reduce systematic risk of firms' cash flows if capital and variable inputs are complementary in firms' production and input prices are procyclical. In our dynamic model, this operating hedge effect is weaker for more profitable firms, giving rise to a gross profitability premium. Moreover, gross profitability and value factors are distinct and negatively correlated, and their premia are not captured by the capital asset pricing model (CAPM). We estimate the model by simulated method of moments, and find that its main implications for stock returns and cash flow dynamics are quantitatively consistent with the data.

The currency market features a small cross‐section, and conditional expected returns can be characterized by few signals: interest differential, trend, and mean reversion. We exploit these properties to construct the ex ante mean‐variance efficient portfolio of individual currencies. The portfolio is updated in real time and prices all prominent currency trading strategies, conditionally and unconditionally. The fraction of risk in these assets that does not affect their risk premiums is at least 85%. Extant explanations of carry strategies based on intermediary capital or global volatility are related to these unpriced components, while consumption growth is related to the priced component of returns.

We document that central banks are discontinuously more likely to report slightly positive profits than slightly negative profits, especially when political pressure is greater, the public is more receptive to extreme political views, and central bank governors are eligible for reappointment. The propensity to report small profits over small losses is correlated with higher inflation and lower interest rates. We conclude that there are agency problems at central banks, which give rise to discontinuous profit incentives that correlate with central banks’ policy choices and outcomes. These findings inform the debate about the political economy of central banking and central bank design.

We provide the first tests to distinguish whether individual investors equally balance their overall portfolios (naïve portfolio diversification, NPD) or, in contrast, equally balance the values of same‐day purchases of multiple assets (naïve buying diversification, NBD). We find NBD in purchases of multiple stocks, and in mixed purchases of individual stocks and funds. In contrast, there is little evidence of NPD. Evidence suggests that NBD arises due to stock picking behavior and neglect of diversification. These findings suggest that behavioral finance theory should incorporate transaction, as well as portfolio, framing.

We examine whether and how firms structure their merger and acquisition deals to avoid antitrust scrutiny. There are approximately 40% more mergers and acquisitions (M&As) than expected just below deal value thresholds that trigger antitrust review. These “stealth acquisitions” tend to involve financial and governance contract terms that afford greater scope for negotiating and assigning lower deal values. We also show that the equity values, gross margins, and product prices of acquiring firms and their competitors increase following such acquisitions. Our results suggest that acquirers manipulate M&As to avoid antitrust scrutiny, thereby benefiting their own shareholders but potentially harming other corporate stakeholders.

We build a cross‐sectional factor model for investors' direct stockholdings and estimate it using data from almost 10 million retail accounts in the Indian stock market. Our model identifies strong investor clienteles for stock characteristics, most notably firm age and share price, and for particular clusters of stock characteristics. These clienteles are intuitively associated with investor attributes such as account age, size, and diversification. Coheld stocks tend to have higher return covariance, inconsistent with simple models of diversification but suggestive that clientele demands influence stock returns.

Revisions in successive Greenbook forecasts of quarterly real GDP growth proxy for news of current and expected future economic growth. In the sample 1975 through 2015, news of future growth is slightly negatively related to contemporaneous changes in Treasury bond yields, while news of current growth is strongly positively related to changes in these yields. Both results are difficult to reconcile with a representative agent's bondholding first‐order condition. A continuous‐time dynamic model of output attributes almost all of the covariation with yields to martingale innovations in log output and a minimal amount to innovations in the conditional drift of log output.