Knowledge that Transforms

We show that a firm’s financial constraints trigger investment disruptions that propagate through the production network. Propagation effects account for about half of the total investment reduction due to constraints. Network rigidities such as high input specificity and the scarcity of alternative partners amplify these spillovers. Firms mitigate investment disruptions by supporting constrained partners through trade credit or equity stakes. To bolster identification, we employ a Network Regression Discontinuity Design that accounts for spillovers. Our estimates are robust to network measurement error, endogenous selection, and various constraint measures. The results demonstrate that interdependent investments amplify the consequences of capital-market frictions.

This article documents a trend of declining flexibility in share repurchase policies over the last 4 decades. We show that repurchases have become particularly sticky for firms with repurchase programs in place. We also exploit the additional inflexibility within existing repurchase programs to show that repurchase stickiness can have real effects for firms. Using the 2008 financial crisis as a shock to firms’ ability to raise capital, we find that firms with ongoing share repurchase programs ending after Dec. 2007 reduced investment, employment, and R&D spending by more than similar firms with programs ending before the onset of the crisis.

We find that firms enlarge the executive pay gap when executive mobility is constrained by more enforceable noncompete agreements. We interpret this finding as evidence that firms increase tournament incentives to keep executives incentivized after the loss of valuable outside employment options. Consistent with this argument, we observe more significant increases in pay gaps for executives with greater ex ante mobility options. However, shocks reducing enforceability have a weaker, less robust impact on pay gaps, contributing to asymmetric effects. Following restrictions to mobility, equity portfolios that long (short) firms that boost (do not boost) executive pay gaps generate positive alphas.

We study how equity option trading affects the market risk premium. We find that a measure of aggregate call order imbalance (ACIB), defined as the cross-sectional average of the difference between open-buy and open-sell volume, negatively forecasts future stock market returns significantly from days to months. Moreover, ACIB represents an option-based investor sentiment measure that accounts for excess option buying or selling, and is highly correlated with the stock investor sentiment. Our findings shed new insights on the distinctions for call and put option trading, index and equity option trading, and cross-sectional and time-series predictions.

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Retail investor contrarian selling depends on whether a position is at a gain or a loss. Selling propensity increases in daily returns for positions with unrealized gains (contrarian selling) and decreases in returns for loss positions (trend-following selling). This pattern is consistent with behavioral arguments that investors update their beliefs when stock prices move away from their purchase prices. In line with increased liquidity from contrarian selling, illiquid stocks exhibit weaker short-term reversals when investors have higher unrealized capital gains. Our findings diminish following stock splits, suggesting that unrealized capital gains are central to contrarian behavior, particularly when investors perceive them clearly.

We examine whether free-speech protections influence corporate environmental performance. Using the staggered enactment of U.S. anti-SLAPP statutes in a stacked difference-in-differences design from 1990 to 2019, we find that these laws significantly reduce firms’ toxic emissions without curbing economic activity. Anti-SLAPP enactments also promote environmental investment through green innovation, abatement spending, and waste reduction management, and strengthen governance via improved sustainability oversight, ESG-linked executive pay, employee training, and supply chain management. The effects are stronger when stakeholder monitoring is stronger and when managerial incentives embed sustainability goals. Overall, free-speech protections generate powerful environmental benefits.

This article studies the flow of payout funds in the financial system. Using various data sources and empirical strategies, it provides evidence that a significant portion of payouts enters the banking sector as deposits, which are then intermediated to bank borrowers. The findings highlight an important channel through which corporate payout policies shape capital allocation in the economy and suggest that policies aimed at restricting payouts may distort this process by limiting the flow of funds from large and profitable corporations to small, bank-dependent firms and households.

We examine hidden orders usage by algorithmic traders (ATs) and nonATs. ATs extensively use hidden orders but of smaller size than nonATs, who are the primary contributors to hidden volume. ATs’ relative share of hidden volume decreases with volatility, adverse selection costs, and the relative tick-size. Proprietary ATs (HFTs), who differ from agency ATs (AATs) in their information sets and potential gains from trade, hide orders to reduce competition for liquidity provision, whereas AATs use hidden orders to conceal information in their more informed orders and manage picking-off risk. Finally, superior technology provides limited benefit for hidden order execution.

This article investigates sample selection bias in early-stage investment. We use comprehensive administrative data on the universe of new firm starts in Norway, allowing us to compare venture-backed firms with ex ante similar firms that do not receive venture funding. The valuation premium for venture backing is sizeable at firm birth and doubles over the first 5 years, implying a substantial upward bias in venture capital (VC) returns relative to comparable firms. In contrast, the premium for firms receiving multiple rounds of outside equity emerges only after the first year and remains significantly smaller than the VC premium throughout the firm life cycle.