Knowledge that Transforms

This study examines how various facets of social and political freedom shape the impact of political connections on bank lending. Using a new dataset covering the period 2007–2018 and more than 100 countries, we find that the establishment of political connections stimulates lending, but only in countries with constrained media freedom and restricted freedom of association and expression, as well as in those scoring low on political rights and civil liberties. These results suggest that social and political freedom constitute critical factors that limit the resource-allocation distortions caused by political connections.

This study investigates the association between corporate digital transformation and default risk for a sample of Chinese-listed firms from 2009 to 2022. We find a robust positive association between digital transformation and corporate default risk. Further tests reveal the destabilizing impact of digital adoption strengthens under greater competition, human capital intensity, shareholder expropriation, and weak monitoring. The additional analysis points to resource misallocation and managerial manipulations as two potential channels propagating distress. We show that digital transformation correlates with escalated asset impairments and financial frauds. Our study provides evidence that digital transformation strategies entail underappreciated risks to financial stability.

Social psychology research suggests that management groups under greater external pressure are more prone to groupthink (i.e., a tendency to reach premature consensus), leading to greater performance volatility. To isolate the group dynamics channel, we focus on the pressure management faces from largely uninformed and dissatisfied non-blockholders. Consistent with the groupthink view, we find that non-blockholder dissatisfaction is positively associated with performance volatility, which is further corroborated by tests addressing omitted variable bias and reverse causality. In addition, the baseline relationship is stronger in firms with greater interaction among directors, more powerful CEOs, and less diverse boards. Our findings suggest that non-blockholder dissatisfaction heightens performance volatility by exacerbating groupthink.

We shed light on the narrative that listing contributes to risk-taking by examining the risk characteristics of listed BHCs, small enough to be private, against a sample of comparable private BHCs, large enough to be listed, over the 1987–2019 period. We measure our proxies for risk characteristics over different intervals in the sample period to account for the effect of new regulations and variation in the intensity of information production by regulators, markets, and financial firms. We document that listed banks are riskier than private banks over the 22-year sample period. Examining the subperiods, we find that listed banks are riskier than private banks before the crisis, but they may not be as risky following the crisis. While risk increases for all banks during the crisis, the increase in risk for listed banks during the crisis is greater than that for private banks. Our findings are both statistically and economically significant and suggest that financial reforms and regulatory expectations facing banks post-crisis might have contributed to the risk reduction for listed banks relative to private banks.

This paper investigates the role of common institutional blockholders (CIBs) in promoting strategic alliances and facilitating the transfer of human capital between alliance partner firms. We find that firms are more likely to form strategic alliances (including research and development (R&D), licensing, manufacturing, and marketing alliances) when they share CIBs with a larger proportion of their industry peers. To establish a causal relationship, we exploit the exogenous shocks to CIB ownership induced by annual Russell 1000/2000 index reconstitutions. Our firm-pair-level analysis indicates that two firms are more likely to form alliances when they share a CIB. Additionally, we show that R&D alliance partner firms connected through CIBs exhibit greater across-partner redeployment of R&D-related human capital than partner firms without CIB connections. Overall, our findings underscore the significance of common institutional blockholder ownership in reducing the distrust that hinders strategic alliance formation and in realizing the economic benefits of such alliances.

The involvement of the Communist Party of China in corporate decision-making has formed a corporate governance model with “Chinese characteristics” that diverges from commonly studied governance models. This paper aims to provide direct insight into China’s corporate governance model by examining how the involvement of Party organizations in corporate governance influences the performance of private firms. To address endogeneity concerns, we use a quasi-natural experiment (i.e., sudden deaths of board directors) that leads to an exogenous change in the proportion of Party directors. Using difference-in-differences estimation, we find that an increase in the proportion of Party directors (i.e., stronger political governance) improves private firms’ performance. This finding is robust to various tests. Moreover, the channel analysis suggests that the Party organization performs advisory and supervisory functions in corporate governance. Last, we present evidence that the excessive involvement of the Party organization in corporate governance also imposes political costs on private firms.

Fire-sale (FS) vulnerabilities, including those associated with nonbank financial intermediaries, are often measured using FS models. While existing studies use granular data to analyze these dynamics, the scope tends to focuses on a particular jurisdiction, leaving out the cross-jurisdictional dimension. This paper uses flow of funds data from Japan, the United States, and the Euro area to measure cross-border spillovers of market shocks (interlinkage effect) in the global financial system using a standard FS model. We find that the interlinkage effect has substantially increased at the global level since the global financial crisis, suggesting a global structural change in the transmission of market shocks.

The breakdown of the interbank market was a critical moment in the unfolding of the global financial crisis of 2007–2008. We argue that the adequate pricing of risks is critical for the functioning of a market of such vital importance as the interbank market. We use a unique panel data set that allows us to quantify counterparty risk and different types of systemic risks associated with interbank exposures. We use a simultaneous equation model for interbank lending and deposit rates to study whether counterparty risk and systemic risk are adequately priced. As expected, we find that riskier banks on average pay a higher deposit rate. However, on average, banks grant a discount in their lending rates to riskier banks. For systemic risk, we also find mixed results. The positive effect on the deposit rate declines, but the negative effect on the lending rate remains. We argue that the mixed results regarding the pricing of systemic risk might ex-post justify parts of the Basel III reform package that forces systemically important banks to hold higher capital buffers.