Knowledge that Transforms

Exploiting confidential data from the euro area, we show that sound banks pass negative rates on to their corporate depositors and that pass-through is not impaired when policy rates move into negative territory. We do not observe a contraction in deposits, reflecting a general increase in corporate liquidity during the sample period. When their banks charge negative rates on deposits, firms with ex ante high liquidity invest more than comparable firms that are not charged negative rates and increase their liquid holdings less. These results challenge the common view that conventional monetary policy becomes ineffective at the zero lower bound.

We find that an option-based equity tail risk factor is priced in the cross section of currency returns; more exposed currencies offer a low risk premium because they hedge against equity tail risk. A portfolio that buys currencies with high equity tail beta and shorts those with low beta extracts the global component in the tail factor. The estimated price of risk of this novel global factor is consistently negative in currency carry and momentum portfolios, and in portfolios of other asset classes, suggesting that excess returns of these strategies can be partially understood as compensations for global tail risk.

Material news events can be potentially important sources of jumps in stock returns. We collect 21 million news articles associated with more than 9000 publicly-traded companies and use textual analyses to derive measures to summarize the news. We find that stock return jumps (including time-variation in jump-size distributions and jump intensity) are significantly related to news flow frequency and content and those effects increase substantially over the last few decades. The sensitivity of jump probability to news is stronger for firms with higher media visibility, analyst coverage, and institutional ownership. This sensitivity also varies across different news categories.

This paper shows the cross-sectional and time series momentum in currencies, which cannot be explained by carry and dollar factors, summarize the autocorrelation of these factors. These momentum strategies long currency factors following positive factor returns and short them following losses. Carry and dollar factors are strongly autocorrelated and only earn significantly positive excess returns following positive factor returns. By contrast, idiosyncratic currency returns contain little momentum. Consequently, factor momentum not only outperforms the cross-sectional and time series momentum but also explains them. Limits to arbitrage and time-varying risk premium help explain factor momentum.

We study the effect of the US Affordable Care Act (ACA) on healthcare borrowing costs. The ACA provides insurance subsidies to low-income enrollees. States could accept funding to expand Medicaid, although many declined, citing the cost burden. The ACA significantly reduced healthcare yields after a favorable 2012 Supreme Court ruling. Furthermore, hospital investment spending increased, and investment-cash flow sensitivities decreased. The yield effect was double in Medicaid expansion states, and insignificant in rural areas of non-expansion states. Our results highlight how the municipal market can be used to evaluate the heterogeneous effects of public policy and guide a targeted policy approach.

We study retail shareholder voting using a nearly comprehensive sample of U.S. ownership and voting records. Analyzing turnout within a rational-choice framework, we find participation increases with ownership and expected benefits from winning and decreases with higher costs of participation. Even shareholders with a negligible likelihood of affecting the outcome have non zero turnout, consistent with consumption benefits from voting. Conditional on participation, retail shareholders punish the management of poorly performing firms. Overall, our evidence provides support for the idea that retail shareholders utilize their voting power to monitor firms and communicate with incumbent boards and management.

We study competition for startups among VCs with heterogeneous skill. VCs with established skill face two impediments. First, less established VCs compete aggressively for new startups in order to establish a reputation. Second, startups also value reliability in their VCs, which imposes a higher cost on established VCs because they have better outside options. As a result, startups “over-experiment” by excessively partnering with less established VCs, which crowds out established skill and reduces social welfare. Established VCs are hurt because they need to pay more to attract startups, lose profitable opportunities, and face increased competition from newly established VCs.

Market betas have a strong and positive relation with average stock returns on a handful of days every year. Such unique days, defined as leading earnings announcement days (LEADs), are times when an aggregate of influential S&P 500 firms disclose quarterly earnings news early in the earnings season. The positive return-to-beta relation holds for various test portfolios, individual stocks, and Treasuries; and is robust to different data frequencies and testing procedures. On days other than LEADs, the beta-return relation is flat. We conclude that waves of early earnings announcements by large firms clustered on LEADs significantly influence asset pricing.

Ample literature builds on the notion that real estate values boost corporate secured borrowing (“collateral channel”). A comprehensive contract-level database allows us to observe the value, location, and end-use of firms’ real estate holdings in the US and all debts raised against those assets over the 2000–2017 period. Firms raise new debt following an increase in the value of their real estate but use unsecured rather than secured borrowing. We rationalize these findings with a model where firms’ choices between secured and unsecured debt reflect the systematic risk exposures of the assets on their balance sheets. While secured debt may be seen as a safer claim than unsecured debt contractually, we demonstrate that it can be riskier from an economic perspective. Our analysis adds new insight into how firms set their debt structure.

We examine how investor demand for leverage shapes asset management fees. We show that in the sample of U.S. equity mutual funds: (1) fees increase in fund market beta precisely for beta larger than one; (2) this relation becomes stronger and high-beta funds experience larger inflows when leverage constraints tighten; and (3) low net alphas are especially common among high-beta funds. These results are consistent with a model in which asset managers compete for leverage-constrained investors with heterogeneous risk aversion. The asymmetric relation between betas and fees also extends to the HML and SMB factors.