Knowledge that Transforms

This study investigates inter-generational transmissions of parental bankruptcy shock on children's financial behavior in adulthood. Our results show that younger children who were 9 years or below when their parents declared bankruptcy were 2–3 % points less likely to declare bankruptcy than their older siblings who were 10 years and older when the parents’ bankruptcy event occurred. We rule out alternative hypotheses, including birth order, cohort effects, and truncated sample bias. We find corroborative evidence for the “parent socialization” channel, where bankrupt parents, through interactions with children during childhood years, influence their financial behavior and reduce the risks of their children repeating the same mistakes in adulthood.

This paper investigates both the magnitude and the drivers of bank window dressing behavior in euro-denominated repo markets. Using a confidential transaction-level data set, our analysis illustrates that banks engineer an economically sizeable contraction in their repo transactions around regulatory reporting dates. We establish a causal link between these reductions and banks’ incentives to window dress and document the role of the leverage ratio and the G-SIB framework as the most relevant drivers of window dressing behavior. Our findings suggest that regulatory action is warranted to limit banks’ ability to window dress.

We develop a model in which credit ratings are endogenously coarse relative to the underlying default probabilities, and ratings precision is countercyclical. Ratings coarseness arises from the profit-maximizing behavior of rating agencies, and coarseness may maximize welfare even when greater ratings precision is costlessly available. Because the private outcome may differ from the socially desirable outcome, a social planner can improve welfare by putting a ceiling (floor) on the rating agency’s fee if the desired outcome is coarseness (precision). Strikingly, when information production is costless, ratings coarseness is socially optimal, but it does not arise in the laissez-faire equilibrium, thus inviting regulatory intervention.

We investigate the impact of two central bank policies, asset purchases and asset lending, on the search frictions in the government bond market in Japan. We build a search-theoretic model to explore the impact of a central bank’s securities lending facility (SLF) by introducing a central bank as a lender. We test model predictions using intraday data from an electronic platform for Japanese government bonds. First, we find large-scale asset purchases (LSAPs) increase order imbalance in the repurchase agreement (repo) market. Threshold analysis reveals that asset purchase amounts exceeding 0.18% of the outstanding, which corresponds to 38.98% of our sample, cause a significantly higher imbalance. Second, the SLF has a floor effect on the repo rate by affecting dealers’ choices between the repo market and the SLF. Third, the novel friction measures we test show that LSAPs and the SLF have opposite influences on bargaining power in the repo market.

We make use of rich U.S. data to show that debt overhang significantly reduces firm asset-, capex-, and employee-growth. We show these contractions are likely driven by firm decisions as opposed to the result of credit constraints or changes in investment opportunities. Our measure of overhang – liabilities to cash flow — aligns with traditional theory and focuses on the importance of a firm’s debt servicing capacity. It further allows us to capitalize on the COVID-19 shock as a quasi-natural experiment to confirm the impact of overhang on firm investment and growth.

We describe the dimensions along which bank technologies differ from fintech competitors and construct a novel measure of a bank’s technology based upon its overlap with fintech firms in terms of granular product installation data. A one standard deviation increase in our financial technology measure is associated with an 8.3 percentage point increase in Paycheck Protection Program (PPP) loans in 2020Q2. We show that smaller banks benefited more from marginal technology gains, that technology facilitated out-of-area lending, and that technology complemented small banks’ branch-based in-area lending. In a difference-in-differences analysis, we show an outsized increase in small business lending growth in 2020 for high tech small banks relative to their peers.

This paper provides the first study on how management structure influences hedge fund performance and risk. We document that hedge funds less tied to traditional assets often choose solo management structures. Solo-managed funds outperform team-managed funds, exhibit better skills in market return, volatility, and crisis timing, and demonstrate greater activity in beta management, but have higher idiosyncratic and tail risks. They are also less likely to be liquidated, with fund flows less performance sensitive. Using a sample of switched funds, we find that fund performance, assets, and risk correlate with the management structure switching decision.