Knowledge that Transforms

Every financial crisis raises questions about how the banking market structure affects the real economy. Although low bank concentration may reduce markups and foster riskier behavior, concentrated banking systems appear more resilient to financial shocks. We use a nonlinear dynamic stochastic general equilibrium model with financial frictions to compare the transmissions of shocks under different competition and concentration configurations. The results reveal that oligopolistic competition amplifies the effects of the shocks relative to monopolistic competition. The transmission mechanism works through the markups, which are amplified when banking concentration is increased. The desirable banking market structure is determined according to financial stability and social welfare objectives. Moreover, we find that depending on policymakers’ preferences, a banking concentration of five to eight banks balances social welfare and bank stability objectives in the United States.

The present study investigates the impact of a target entity’s corporate social responsibility (CSR) credentials, board diversity, and stock return synchronicity on analyst coverage decisions. Based on more than 33,000 stock recommendations on UK listed companies, we significantly deepen and extend the relevant literature (Kumar, 2010; Li et al, 2013; and Li et al., 2024) in several important ways. We find female analysts are more likely than male analysts to impound CSR information into stock coverage decisions for entities with intermediate recommendations. For firms with more extreme economic prospects. i.e., at strong buy and sell levels, the positive effect of CSR performance on female analyst coverage weakens. After controlling for the CSR characteristics of a stock, results suggest female analysts are more likely to cover firms with gender-inclusive boards. Results accord with a narrative emphasizing female analysts’ weaker access to firms with less gender-inclusive boards. Our account adds new context and application to the emerging corporate finance literature on gender-based homophily. Finally, we report limited difference in the stock return synchronicity of firms covered by male and female analysts.

We add to the literature on the economic outcomes of government debt and argue that government debt increases crash risk via two channels: (i) hoarding bad news and (ii) tax avoidance. Based on a large international sample, our results indicate that stock crash risk is positively associated with government debt. Our conclusions are robust when we treat endogeneity issues, and our tests confirm the validity of bad news hoarding and tax avoidance as channels through which government debt influences stock price crash risk.

This paper studies the dynamics of contagion across the banking, insurance and shadow banking sectors of 18 advanced economies in the period 2006-2018. We construct Granger causality-in-risk networks and introduce higher-order aggregate networks and higher-order node centralities in an economic setting to capture non-Markovian network features. Our approach uncovers the dynamics of financial contagion as it is transmitted across segments of the financial system and jurisdictions. The calculated higher-order centralities identify sectors in distress as the nodes through which contagion propagates. The banking system emerges as the primary source and transmitter of stress while banks and shadow banks are highly interconnected. The insurance sector is found to contribute less to stress transmission in all periods, except during the global financial crisis. The proposed approach is able to identify clearly the sectors that are critical for the transmission of financial contagion, in contrast to the commonly used memoryless measures of network centrality.

We analyse the double materiality of climate physical and transition risks in the euro area economy and banking sector. First, by tailoring the EIRIN Stock-Flow Consistent behavioural model, we provide a dynamic balance sheet assessment of the Network for Greening the Financial System scenarios. We find that an orderly transition achieves early co-benefits by reducing CO2 emissions (12% less in 2040 than in 2020) while supporting growth in economic output. In contrast, a disorderly transition worsens the economic performance and financial stability of the euro area. Further, in a disorderly transition with higher physical risks, real GDP decreases by 12.5% in 2050 relative to an orderly transition. Second, by extending the concept of climate sentiments, we analyse how firms’ expectations about climate policy credibility affect investment decisions in high or low-carbon goods. Firms that trust an orderly policy introduction and anticipate the carbon tax switch earlier to low-carbon investments. This, in turn, accelerates economic decarbonization and decreases the risk of carbon-stranded assets for investors. Our results highlight the crucial role of early and credible climate policies to signal investment decisions in the low-carbon transition.

In this paper, we examine how employee lawsuits are related to firms’ business decisions. By using union-filed lawsuit data, we document that litigation increases the likelihood of firms downsizing their businesses. Furthermore, cases filed by unions lead to an increase in both the number of store closures and the number of employees affected by these closures. We demonstrate that violations related to labor have a significant negative impact on operating performance. Our findings reveal the fact that the cost of labor, damage to reputation, legal liabilities, and diverted resources resulting from litigation damages firms’ new business opportunities. Overall, our results highlight the importance of employee treatment at the workplace, which affects corporate decisions.

Credit contractions are costly, but policymakers have limited tools to counter them. In this paper, we examine the efficacy of public credit guarantees as antidotes to a credit crunch by studying the Paycheck Protection Program (PPP). We find that the program averted a historic credit crunch at a time when banks were unlikely to meet firm credit needs by risking their own capital. Our evaluation incorporates selection effects emanating from banks’ participation decision on both the extensive and intensive margins. Risk-aversion, rather than profitability, motivated bank participation in the program. Indeed, even as the program boosted loan growth among participants, it attenuated profitability.

How financial investors may react to policy events related to sustainability and climate change mitigation in particular, is a key question with implications for sustainable finance and financial stability. We address this question by carrying out a multi-period difference-in-difference approach on a confidential database of securities holdings of the European Central Bank, and we provide evidence of several effects related to the Paris Agreement. In aggregate, investors reduced their participation in the equities of high-carbon firms in response to the agreement, and the trend reverted after the US’s announcement of withdrawal from the agreement. However, the reaction varies across categories and geographies of the securities holders, their ownership size, and the emissions of owned firms. In particular, transition risk has been taken up by less regulated financial institutions and the BRIC countries. Our results highlight that the redirection of global financial flows towards climate action requires clear and unanimous signals from the global community of policy makers.

We examine corporate disclosure patterns according to changes in firm states during financial crises in Korea. Using panel data on Korean listed firms from 1995 to 2019, we first confirm that they transparently (opaquely) disclose information when the change in return on assets is positive (negative) during crises. Moreover, we check that these disclosure patterns increase debt financing but are ineffective for equity financing. Finally, for chaebols with internal capital markets, we find that internal capital receivers provide transparent (opaque) disclosure of negative (positive) changes in their states. By contrast, providers show the opposite patterns. (JEL G01, G30, M40)

We provide a joint non-parametric test to gather insights on the boundaries of applicability of Stochastic Discount Factor (SDF) models. We find that a non-trivial class of models cannot price the U.S. stock market equally weighted portfolio, implying non-monotonic SDFs, especially over the last 50/60 years in (recessionary) periods characterized by higher market volatility. Stocks responsible for this rejection mostly belong to the smallest NYSE market cap decile, are characterized by high idiosyncratic risk, and typically cannot be priced via SDF models where the aggregate level of risk aversion is bigger then 9 or 10. Excluding these stocks increases the ability to explain the cross-section of returns without impairing the ability to span the mean–variance frontier.