Using the case of the pogroms that took place in the historical region of the 'Pale of Settlement' in Eastern Europe, this paper analyzes the cultural legacy of ethnic violence and its long-term economic impact on access to finance and on corporate innovation. We find that firms in regions with a higher historical intensity of ethnic persecution face greater financial constraints, relying more on internal finance and experiencing reduced access to external finance. These financial limitations are linked to sluggish innovation activities among present-day firms. We propose that a mechanism of financial antipathy, rooted in a persistent anti-market culture fostered by historical ethnic animosity, explains these effects and reflects a long-term degradation of local social capital. Our results are supported by causal evidence using instrumental variables based on the precursors of historical inter-ethnic violence. The animosity and discrimination against the minority group appear to transfer to the broader economic activities in which that group was involved, creating lasting economic consequences for the majority population – consequences that continue to affect financial development and innovation to the present day.

We study a significant innovation with widespread consequences for the mutual fund industry: the introduction of multiple-class funds that give investors a choice among alternative load and fee structures. The transition to a multiple-class structure represents an important step in the evolution of the mutual fund industry. It also provides a well-controlled setting for research on the structure of funds, on investor clienteles and their impact on fund performance and, more generally, about the manner in which financial innovations tend to be adopted. We develop a simple model of a fund's decision on whether and when to introduce new classes and empirically investigate the model's predictions that: (a) Funds with more skilled management, less sensitivity of flows to performance, smaller size, higher existing loads and membership in larger families are better positioned to benefit and, therefore, more likely to switch to a multiple-class structure earlier; (b) The new classes increase the level and volatility of fund inflow by attracting investors with short and uncertain investment horizons – which, in turn, can negatively impact fund performance. Our empirical results are generally supportive of the model's predictions.

Different modes of external finance provide heterogeneous benefits for the borrowing firms. Informal finance offers informational advantages whereas formal finance is scalable. Using unique survey data from China, we find that informal finance is associated with higher sales growth for small firms but lower sales growth for large firms. We identify a complementary effect between informal and formal finance for the sales growth of small firms, but not for large firms. Co-funding, thereby simultaneously using the informational advantage of informal finance and the scalability of formal finance, is therefore the optimal choice for small firms.