Knowledge that Transforms

We develop a model to compare the governance of traditional shareholder-owned platforms to that of platforms that issue tokens. A traditional shareholder governance structure leads a platform to extract rents from its users. A platform that issues tokens for its services can mitigate this rent extraction, as rent extraction lowers the platform owners’ token seigniorage revenues. However, this mitigation from issuing “service tokens” is effective only if the platform can commit itself not to dilute the “service token” subsequently. Issuing “hybrid tokens” that bundle claims on the platform’s services and its profits enhances efficiency even absent ex-ante commitment power. Finally, giving users the right to vote on platform policies, by contrast, redistributes surplus but does not necessarily enhance efficiency.

We study the stock market performance of firms with Jewish board members during the “Dreyfus Affair” in 19th century France. In a context of widespread latent antisemitism, initial accusations made against the Jewish officer Alfred Dreyfus led to short-lived abnormal negative returns for Jewish-connected firms. However, investors betting on these firms earned higher returns during the period corresponding to Dreyfus' rehabilitation, starting with the publication of the famous op-ed J'Accuse! in 1898. Our conceptual framework illustrates how diminishing antisemitic biases among investors might plausibly explain these effects. Our paper provides novel insights on how antisemitism can increase and decrease over short periods of time at the highest socio-economic levels in response to certain events, which in turn can affect firm value in financial markets.

We present a rational expectations model of credit-driven crises, providing a new perspective to explain why credit booms can lead to severe financial crises and aftermath slow economic recoveries. In our model economy, banks can operate in two types of business. They are sequentially aware of the deterioration of fundamentals of the speculative business and decide whether to continue credit extension in that business or liquidate capital and move into the traditional business. However, because individual banks face uncertainty about how many of their peers have been aware, they rationally choose to extend credit in the speculative business for a longer time than is socially optimal, leading to an over-delayed crisis and consequently more banks being caught by the crisis. This in turn renders the financial crisis more severe and the subsequent economic recovery slower. Extending to a standard textbook macroeconomic growth setting, our model also generates rich dynamics of economic booms, slowdowns, crashes, and recoveries.

What characteristics of mutual funds do investors care about? In addition to performance and fees, we show that investors exhibit a clear preference for managers who adhere to the strategies they describe in their prospectuses. Capital flows respond negatively when funds diverge from the average holdings of their text-based strategy peer groups , but positively when they outperform those peer averages. We identify this effect using a novel instrumental variables approach, and show that funds face a delicate trade-off between keeping their promises and outperforming their peers who make similar promises.

Does the stock market exert short-term pressure on listed firms, do they respond, and is this response value reducing? We show that limited investor horizons indeed have those consequences, as follows. First, informative stock prices increase firm value; in our model, they reduce the agency cost of incentivizing managers. Second, short project maturity improves stock price informativeness by catering to informed investors with short horizons. Third, since informed trading capital is a scarce resource, attracting informed investors cannot increase an individual firm’s price informativeness in equilibrium: it simply destroys shareholder value. This “short-termism trap” can potentially destroy up to 100% of the benefits of stock market listing.

We develop and test a model in which swap spreads are determined by end users' demand for and constrained intermediaries' supply of long-term interest rate swaps. Swap spreads reflect compensation both for using scarce intermediary capital and for bearing convergence risk—i.e., the risk spreads will widen due to a future demand-and-supply imbalance. We show that a proxy for the intermediated quantity of swaps—dealers' net position in Treasuries—flipped sign during the Global Financial Crisis when swap spreads turned negative and that this variable predicts the excess returns on swap spread trades. Exploiting our model's sign restrictions, we identify shifts in demand and supply and find that both contribute significantly to the volatility of swap spreads.

Theory suggests that increasing idiosyncratic, uninsurable labor income risk may cause individuals to reduce the risk in their financial assets. This relationship is confounded empirically by the tendency of risk tolerant people to choose riskier careers and hold riskier portfolios, leading to an upward-biased estimate of the effect of earnings risk on risky assets holdings. We overcome this identification problem by exploiting a discontinuity built into the Danish national university admissions system, which provides quasi-random assignment of similar applicants to programs with different earnings volatility profiles. Our methodology allows us to measure the causal impact of enrolling in a high-volatility program, holding fixed the average program earnings and human capital betas. We show that entering a program whose enrollees subsequently experience volatile earnings causes students to have more volatile earnings and, ceteris paribus, to hold fewer risky assets and be less likely to participate in the stock market. We calibrate our empirical results to a portfolio choice model with risky labor income that fits our empirical findings well with modest participation costs, myopic behavior, and reasonable levels of risk aversion.

We examine social media attention and sentiment from three major platforms: Twitter, StockTwits, and Seeking Alpha. We find that, even after controlling for firm disclosures and news, attention is highly correlated across platforms, but sentiment is not: its first principal component explains little more variation than purely idiosyncratic sentiment. Using market events, we attribute differences across platforms to differences in users (e.g., professionals versus novices) and differences in platform design (e.g., character limits in posts). We also find that sentiment and attention contain different return-relevant information. Sentiment predicts positive next-day returns, but attention predicts negative next-day returns. These results highlight the importance of considering both social media sentiment and attention, and of distinguishing between different investor social media platforms.

We examine how a fixed capital supply shortage affects firm investment. Using equipment transaction–level data, we find pandemic-driven production disruptions significantly altered capital reallocation patterns across firms. A surge in used capital trading activity softened the investment decline, as firms acquired used capital from distant and dissimilar counterparts. Younger firms were disproportionately affected even though they rarely purchase new capital: while in normal times older firms sell their capital to younger firms, following a supply shortage, older firms compete for used capital, pricing out younger firms. Our evidence highlights the crucial role of secondary markets and distributive externalities for corporate investment.

The slope carry takes a long (short) position in the long-term bonds of countries with steeper (flatter) yield curves. The traditional carry takes a long (short) position in countries with high (low) short-term rates. We document that: (i) the slope carry return is slightly negative (strongly positive) in the pre (post) 2008 period, whereas it is concealed over longer samples; (ii) the traditional carry return is lower post-2008; and (iii) expected global growth and inflation declined post-2008. We connect these findings through an equilibrium model in which countries feature heterogeneous exposure to news shocks about global output and global inflation .