Knowledge that Transforms

Abstract We examine whether climate change news risk is priced in corporate bonds. We estimate bond covariance with a climate change news index and find that bonds with a higher climate change news beta earn lower future returns, consistent with the asset pricing implications of demand for bonds with high potential to hedge against climate risk. Moreover, when investors are concerned about climate risk, they are willing to pay higher prices for bonds issued by firms with better environmental performance. Our findings suggest that corporate policies aimed at improving environmental performance pay off when the market is concerned about climate change risk.

Abstract Firms with greater shareholder rights have a greater risk-shifting incentive, requiring more lender monitoring. Thus, a reduction in shareholder rights implies more diffused (less monitoring-intensive) loan syndicates. Using the passage of U.S. second-generation antitakeover laws as an exogenous shock that reduces shareholder rights as a natural experiment, we find that loan syndicates become significantly more diffuse after the passage of these laws. These results are confirmed in a large sample of bank loans made during the 1990–2007 period when the loan syndicate market matured. Our results show how corporate governance causally affects financial contracting and creditor control in firms.

Abstract This article studies the impact of unconventional monetary policy on bank lending and security holdings. I exploit granular security register data and use a difference- in-differences regression setup to provide evidence for a yield-induced portfolio rebalancing: Banks experiencing large average yield declines in their securities portfolio, induced by unconventional monetary policy, increase their real-sector lending more strongly relative to other banks. The effect is stronger for banks facing many reinvestment decisions. Moreover, I find that banks with large yield declines reduce their government bond holdings and sell securities bought under the asset-purchase program of the European Central Bank (ECB).

Abstract This article studies the impact of retail investors on stock liquidity during the COVID-19 pandemic lockdown in spring 2020. Retail trading exhibits a sharp increase, especially among stocks with high COVID-19–related media coverage. Retail trading attenuated the rise in illiquidity by roughly 40% but less so for high-media-attention stocks. Causality is addressed using the staggered implementation of the stay-at-home advisory across U.S. states. The results highlight that ample free time and access to financial markets facilitated by fintech innovations to trading platforms are significant determinants of retail-investor stock market participation.

Abstract This article studies dynamic compensation and risk management under cash-flow volatility shocks. The optimal contract depends critically on firms’ ability to make good on promised future payments to managers. When volatility is low, firms with full commitment ability implement high pay–performance sensitivity to motivate effort from managers, and they impose large penalties on the arrival of volatility shocks to incentivize prudent risk management. In contrast, firms with limited commitment may allow excessive risk taking in exchange for low pay–performance sensitivity. When volatility becomes high, firms with full commitment defer compensation more, whereas firms with limited commitment must expedite payments.

Abstract We analyze the bank supply of credit under the Paycheck Protection Program (PPP). The literature emphasizes relationships as a means to improve lender information, which helps banks manage credit risk. Despite imposing no risk, however, the PPP supply reflects traditional measures of relationship lending: decreasing in bank size and increasing in prior experience, commitment lending, and core deposits. Our results suggest a new benefit of bank relationships: They help firms access government-subsidized lending. Consistent with this benefit, we show that the bank PPP supply, based on the structure of the local banking sector, alleviates increases in unemployment.

Abstract We examine how local political corruption affects firm innovation in the United States. We find that firms located in highly corrupt areas are less innovative as measured by their patenting activities. The results are robust to the inclusion of a broad set of regional characteristics, instrumental variable analysis, matching analysis, difference-in-differences test, and alternative proxies for local corruption. Further analysis shows that reduced innovation incentives due to high extortion risk and decreased threat of competition could be the possible economic channels through which corruption affects innovation. Overall, our results indicate that local political corruption impedes corporate innovation in the United States.