Knowledge that Transforms

Using a proprietary data set covering all foreign investors’ daily trades in the Chinese stock market from 2016 to 2019, we find that foreign order flows, facilitated by regulatory liberalization through several channels, present strong predictive power for future stock returns, implying that these order flows are likely informed. We track the source of this informativeness and find that foreign order flows significantly predict firm-level news and news-day returns, suggesting that foreign investors can effectively process local firm information. Finally, we find that regulatory reforms that generally relax investment access requirements further improve foreign investors’ predictive power.

The identification of disaster risk has remained a significant challenge due to the rarity of macroeconomic disasters. We show that the interbank market can help characterize the time variation in disaster risk. We propose a risk-based model in which macroeconomic disasters are likely to coincide with interbank market failure. Using interbank rates and their options, we estimate our model via maximum likelihood estimation (MLE) and filter the short-run and long-run components of disaster risk. Our estimation results are independent of the stock market and serve as an external validity test of rare disaster models, which are typically calibrated to match stock moments.

This study examines the impact of recreational marijuana laws (RMLs) on firm-level employment using an imputation-based difference-in-differences (DiD) approach across U.S. states. RMLs significantly reduce employment, particularly among firms with high-skilled labor, strong union presence, permissive corporate cultures, and in states with greater dispensary density. Alternative explanations—including economic crises, COVID-19, fiscal changes, labor regulations, and related policies such as smoking bans and right-to-work (RTW) laws—are systematically ruled out through a series of placebo and robustness tests. RMLs also reduce investment, sales growth, and innovation, suggesting that legalization introduces labor-related frictions with broad implications for firm performance and long-term dynamism.

We show that the decision to go public is influenced by spatial variation in the supply of equity financing. We measure the amount of capital of equity investors in each U.S. region and document that the incidence of initial public offerings (IPOs) by intangible-intensive resident firms increases significantly when regional equity capital is abundant. Using a novel empirical strategy and hand-collected data on out-of-state pension flows, we confirm that our findings are not due to underlying regional factors.

We exploit U.S. states’ staggered adoption of Universal Demand (UD) laws to study how the risk of shareholder lawsuits affects insider trading. UD laws, which make it harder for shareholders to bring derivative lawsuits against directors and officers, lead to more profitable insider trades, especially sales. This effect is stronger among smaller firms and firms with lower institutional monitoring. After UD laws, the timing of insiders’ trades also appears more opportunistic and riskier, for example, sales increase before negative earnings surprises. Overall, our study offers clean evidence that the threat of shareholder litigation deters opportunistic insider trading.

We report evidence consistent with institutional investors using industry-level information that they obtain from their investments in venture capital (VC) funds to earn excess returns in publicly traded stocks. We use court rulings regarding the Freedom of Information Act as an exogenous shock affecting the information flow between VC funds and institutional investors to show that the excess returns are explained by information received via this channel. Thus, institutional investors serve as conduits of information from private to public markets. In the process, institutional investors earn higher returns from their VC investments than implied by the cash flows received therefrom.

We characterize optimal mutual fund risk-taking strategies in competitive multi-period tournaments among multiple players. With multiple competitors, every player begins by taking maximum risk. In the final period, all players continue to take maximum risk except the leading player, who employs a “lock-in” strategy that depends on the magnitude of the lead. Our theory predicts the leader should strategically lock in advantage by reducing risk-taking if and only if the lead is great enough, rather than an increase in risk-taking by the trailers to try to catch up. Empirical evidence from style-adjusted mutual fund tournaments provides strong and robust support.

A well-documented pattern of bank lending during crises is allocating credit to insolvent firms at the expense of productive firms, leading to inefficient resource allocation at the macro level. I investigate the role of bank CEOs in influencing such distortions during crises, using the strictly enforced age-based retirement policy of Indian government-controlled banks. I find that banks experiencing a CEO turnover in a crisis are less likely to bail out insolvent borrowers, as the new CEO has a lower incentive to do so. Consequently, the efficiency of credit allocation improves, and the zombification of the economy decreases.

We document firms often determine CEO equity grants based on a predetermined dollar value (value-based equity grant) instead of on the number of shares (share-based grant). Value-based equity grants weaken the relationship between stock performance and CEO equity pay, lower CEO portfolio delta, and slow firms’ investment in R&D. We find that retention pressure is a key reason for the use of value-based equity pay, while governance could also matter. Overall, this paper alerts boards to the unintended consequences of pursuing a target pay level or pay structure because such practices can lead to value-based equity grants in CEO compensation.

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