Knowledge that Transforms

We use negative durability shocks from vehicle discontinuations to study asset-backed lending and income-based lending (IBL) in auto finance. Discontinuations lead to increased down payments, higher loan-to-value ratios, and larger post-default personal recoveries. These results all indicate that economically disadvantaged consumers are relatively more reliant on unsecured IBL, in stark contrast to corporate financing patterns. Vehicle recoveries on discontinued cars are lower for borrowers who purchase after discontinuations, implying that depreciation is partially borrower-dependent. Our findings suggest that lower-income borrowers, in particular, benefit from technologies that facilitate IBL, such as income monitoring.

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This article offers two novel backtests to evaluate the adequacy of well-known systemic risk measures such as CoVaR, MES, SES, and SRISK. Both the new backtests are robust to estimation risk (i.e., their null distributions remain invariant in the presence of estimation risk). While existing backtest is consistent against divergence from the null hypothesis up to a finite order, the article shows that the new backtests are fully consistent. The real-world implications brought by the new backtests are economically significant as they reveal significantly more cases of inadequate systemic risk modeling among the major financial institutions.

The growing popularity of home-sharing platforms such as Airbnb, partly fueled by hosts’ ability to evade local taxes and regulations, has been shown to elevate housing costs by reallocating long-term housing units to the short-term rental market. This study assesses whether enhanced tax enforcement can mitigate this trend. We analyze staggered tax collection agreements between Airbnb and Florida counties, wherein Airbnb collects taxes from the hosts directly. Using a difference-in-differences methodology, we find these agreements significantly slow the growth of housing costs, highlighting the importance of tax policy in addressing the sharing economy’s influence on housing affordability.

International equity funds attain superior subsequent performance by actively changing their country asset allocations, which we capture through a new measure of active country rotation intensity. Across funds, those that rotate country allocations with the greatest intensity on average have the highest value added. We offer evidence that a fund’s change of holdings in a country is associated with future outperformance in those specific holdings. Outperformance is concentrated on the downside when funds sell down country holdings before subsequent poor country market returns. Overall, our findings affirm that active international mutual funds have country market timing abilities.

Using manually compiled cost of equity (COE) estimates disclosed in takeover regulatory filings, we provide novel evidence on how investment bankers estimate discount rates. COE estimates are related to several risk proxies, such as beta and size. Other firm characteristics are unrelated to COE estimates or provide relations contradicting academic evidence. We also explore the role of incentives. For example, banks use significantly higher COEs in management buyouts, which potentially underestimates target value, making the bid more attractive for target shareholder approval.

We show theoretically and empirically that the cross-section of stock return idiosyncratic volatilities contains useful information about the ICAPM. We construct a proxy cross-sectional bivariate idiosyncratic volatility (CBIV) for the covariance risk between the market and the unobserved hedge portfolio under the ICAPM. Consistent with the ICAPM pricing relation, CBIV is a robust and significant predictor of the equity risk premium. We further show that the return predictability of the tail index in Kelly and Jiang (2014) can be explained by the ICAPM covariance risk.

We examine whether location within a dense regional cluster of interconnected businesses affected firm performance during the Great Recession and the subsequent recovery. Firms in denser regional clusters experienced faster sales growth than their rivals in less dense clusters, especially firms operating in more competitive industries and those more able to reap agglomeration benefits. They also faced lower uncertainty, invested more in both physical capital and intangible capital, and maintained higher employment growth. Their greater resiliency and agility led to significant increases in their valuations. These results suggest that regional clusters provide competitive advantages during turbulent times.

One-third of deals in the venture capital (VC) market involve a founder and investor from the same university. Venture capitalists are more likely to invest in and place larger bets on startups with founders from their alma mater. These deals are also more likely to lead to IPOs postfunding. Tests using VC partner turnover confirm a direct link between education ties and funding likelihood. Taken together, our results suggest that university connections facilitate improved deal-making and outcomes, rather than diverting funds toward lower-quality startups.

Consistent with theories on the equilibrium matching between capital structure and employee job risk aversion, we find a robust, positive association between a firm’s leverage and its employees’ family labor income diversification. Higher-Leverage firms also recruit new employees with greater income diversification. For identification, we exploit two policy shocks that exogenously change employee income diversification and firm leverage, respectively. Individual employee-level tests further reveal that workers with differential risk attitudes adjust their job choices and household labor income portfolios in response to significant shifts in their employers’ leverage. Finally, human bankruptcy costs contribute to the general level of corporate risk-taking.