Knowledge that Transforms

Corporate customers are an important stakeholder in global supply chains. We employ several unique international databases to test whether socially responsible corporate customers can infuse similar socially responsible business behavior in suppliers. Our findings suggest a unilateral effect on corporate social responsibility (CSR) only from customers to suppliers, an evidence further supported by exogenous variation in customers’ close-call CSR proposals and by product scandals. Customers exert influence on suppliers’ CSR through positive assortative matching and their decision-making process. Enhanced collaborative CSR efforts help improve operational efficiency and firm valuation of both customers and suppliers but increase only the customers’ future sales growth.

The stock market should fund promising new firms, thereby breeding competition, innovation, and economic growth. However, using three decades of data from 47 countries, we show that concentrated stock markets dominated by a small number of very successful firms are associated with less efficient capital allocation, sluggish initial public offering and innovation activity, and slower economic growth. These findings are robust to alternative sample periods, econometric specifications, and competing explanatory variables. Our evidence is consistent with the paradox that the capital market of a competitive economy can impede the continuing competitiveness of that economy.

We analyze the funding of start-up companies across financing rounds, focusing on the dynamic interactions between angel investors and venture capitalists. Using unique data from British Columbia, Canada, we show that angels and venture capitalists are dynamic substitutes. This substitutes pattern applies across the performance range of companies. It is less pronounced for serial angels. An instrumental variable analysis, based on available investor tax credits, suggests that the substitutes pattern is driven by company characteristics. Overall, the evidence points to the existence of parallel streams of angel and venture capital funding, with fewer transitions between streams than is traditionally assumed.

We examine 68,044 completed or abandoned M&A transactions involving unlisted targets to determine the effect of transaction rumors on deal-closing propensity and transaction values. Estimation is challenging because rumors may be spread on purpose or emerge accidentally while transaction values are only observable for completed deals and no regulation requires to disclose them. We use indirect inference to overcome these challenges. We find that (a) M&A rumors are deal breakers, (b) rumored but closed deals have higher transaction values, and (c) the combined economic impact of (a) and (b) is negative: in expectation rumors destroy about 32% of transaction value.

Motivated by the theory of demand-based option pricing in imperfect markets, we examine the relation between short-sale constraints and equity option returns, conditional on the level of mispricing in the underlying stock. We report a monotonic relation between various measures of short-sale constraints and delta-hedged returns of put options on overpriced stocks. This relation is robust to controls for firm attributes and limits to arbitrage proxies. Our findings suggest that while investors drive up the demand for these put options, dealers command a high premium as compensation for the increased market making risk. We do not find a robust relation for either put options on underpriced stocks or call options.

This paper uses a quasi-natural experiment to estimate the premium for money-likeness. The 2014 Securities and Exchange Commission (SEC) reform of the money market fund (MMF) industry reduced the money-likeness of prime MMFs by increasing their information sensitivity, while leaving government MMFs unaffected. Investors fled from prime to government MMFs, with total outflows exceeding one trillion dollars. Using a difference-in-differences design, we estimate the premium for money-likeness to be between 20 and 30 basis points (bps). These premiums are not due to changes in investors’ risk tolerance or funds’ risk taking. Our results support recent developments in monetary theory identifying information insensitivity as a key feature of money.

We study an economy without bubbles in which expectations about future discount rates can become self-fulfilling because asset valuations redistribute wealth across different investor cohorts. For such redistribution to take place, the wealth of arriving and existing cohorts must react differently to discount rates, and in addition only the existing agents are marginal in financial markets. The self-fulfilling nature of discount rate expectations means that the economy can address several well-documented empirical asset-pricing facts (excessive volatility, return predictability, low interest rate level and volatility), while all real quantities (aggregate consumption and dividend growth) are smooth.

I show how financial intermediaries affect rental housing quality and affordability by supplying real estate investors with financing for quality improvement projects (i.e., renovations). First, I document a historic surge in improvement activity since the Great Recession. Then, using exogenous variation generated by a 2015 change in regulatory capital requirements, I find that a reallocation of bank credit toward improvement projects accounts for 24% of quality improvements since 2015. The shock increases the supply of high-quality apartments and lowers their rent. However, it raises the average apartment’s rent and accounts for 32% of historically high rent growth over 2015–16.

We directly measure banks’ monitoring of syndicated loans. Banks typically demand borrower information on at least a monthly basis. About 20% of loans involve active monitoring (i.e., site visits or third-party appraisals). Monitoring increases with the lead bank’s incentives and the value of information and is negatively associated with loan spreads and maturity. The monitoring captured by our measures can either complement or substitute for covenant-based monitoring, depending on whether the monitoring informs covenant compliance. Banks increase monitoring following deteriorations in borrower financial condition and credit line drawdowns. Finally, monitoring is positively related to future covenant violations and loan renegotiations.

We develop an approach to identify whether recent technological advancements—such as the rise of commercial satellite-based macro estimates—can provide an alternative to government data. We measure the extent to which satellite estimates affect the value of a government macro announcement using its asset price impact. Our identification relies on cloud cover, which prevents satellites from observing economic activity at a few key hubs. Applying our approach, we find that some satellite estimates are now so effective that markets are no longer surprised by government announcements. Our results point to a future in which the resolution of macro uncertainty is smoother and governments have less control over macro information.