Knowledge that Transforms

We study information substitutability in the financial market through a quasi-natural experiment: the pandemictriggered lockdown that has hampered people's physical interactions hence the ability to collect, process, and transmit interaction-based information. Exploiting the cross-sectional and time-series variations of lockdown and its implications on proximate investment, we investigate how the difficulty of collecting information through physical interactions has prompted a switch to electronic interactions including synchronous interactions such as virtual meetings and asynchronous ones like collecting information from the internet. We show that local-investing funds (LIFs) that mostly relied on physical interactions to access information before the pandemic had even worse performance than other funds, though the difference in performance was insignificant before the lockdown. Moreover, LIFs rebalance portfolios toward faraway stocks due to portfolio diversification and risk reduction. These findings indicate that physical-interaction-based and electronic-based information is not fully substitutable. We also show that the advantages of human-interaction-based information originate mainly from physical contacts, primarily in cafés, restaurants, bars, and fitness centers; and the virtual world based on Zoom/Skype/Team can provide a buffer but cannot substitute personal meetings in generating sufficient information.

During a flight to liquidity, investors demand large amounts of governmentbacked safe assets in a rush. The sluggish reaction of the public supply of safe assets opens up a role for government-sponsored shadow banks. We exploit exogenous changes in both demand and supply of safe assets from the 2014 money fund reform and the 2015 debt limit. We find that shadow banks act as a substitute as well as a complement to public supply during a flight to liquidity. Our findings carry over to the dash for cash at the onset of the Covid-19 pandemic.

We assess issues related to borrower beliefs and mortgage performance using new individual panel data that simultaneously cover borrower expectations, forbearance status during the COVID-19 pandemic, and a wide array of demographic characteristics. First, we establish the determinants of borrower expectations, with local experiences and those of social networks playing important roles. We then show that households who, at origination, were optimistic about future house price appreciation or pessimistic about the possibility of future unemployment were more likely to enter forbearance in 2020. However, by early 2021, appreciation-optimistic borrowers who were in forbearance were likely to have cured or prepaid their loan, while those who expected unemployment were likely to still be in forbearance. We offer three channels by which expectations affect forbearance behavior: choices of initial loan terms, associations with actual future events, and factors related to belief formation that are also plausibly associated with forbearance. Our findings highlight the crucial role borrower expectations play in both leverage choices and mortgage performance.

Utilizing a unique and novel setting of disclosure mandate threshold under Regulation AB (Reg AB), we investigate the relationship between disclosure and trust in asset securitization. Post-Reg AB enactment, we observe a significant bunching of originators just below the disclosure threshold. Less trustworthy originators are more likely to adjust their portfolio sizes to remain below this threshold, particularly when loan originators and deal sponsors are unaffiliated, which are cases in which disclosure plays a greater role in reducing information asymmetry. Additionally, these originators are more likely to misrepresent loan quality. Our findings reveal a strong relationship between disclosure and trust—trustworthy originators disclose more and originate higher-quality loans, while less trustworthy originators disclose less and produce lower-quality loans.