Knowledge that Transforms

Abstract 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.

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Abstract Filing agents—intermediaries used by 80% of U.S. firms—are associated with leakage of information that affects stock prices. Prior to the public release of a securities filing, most firms outsource the final processing and submission of the filing to a third-party filing agent. We find leakage is higher when firms use filing agents than when firms self-file, particularly pre-2018. Leakage is greater when the private information is more valuable and decreases when firms switch to self-filing. Our research suggests filing agents, and a firm’s choice to use them, are an important, understudied channel for the leakage of private information.

Abstract This article presents a New Keynesian model to capture the linkages between macro fundamentals and the nominal yield curve. The model explains bond yields with a low level of news in expected inflation and plausible term premia. This implies that the slope of the yield curve predicts future bond yields and that risk-adjusted historical bond yields satisfy the expectations hypothesis. The model also explains the spanning puzzle, matches key moments for real bond yields, captures the evolution of the price-dividend ratio, and implies that the slope of the yield curve and the price-dividend ratio forecast excess equity returns.

Abstract This study investigates how political patronage influences local firms’ investment decisions in China, focusing on changes in patronage ties resulting from provincial leadership turnover. By examining prefectural officials with connections to their provincial superiors, we find that firms in these regions experience increased investment expenditures, albeit with reduced efficiency. This effect is primarily driven by stronger promotion incentives for local officials, bolstered by favoritism from provincial patrons. While political patronage helps address agency problems within political hierarchies, our findings highlight its adverse economic impact due to misaligned interests between politicians and the public.

Abstract We study the role of competition in customers’ reactions to litigation against firms, using anonymized mobile phone location data. A class action lawsuit filing is followed by a 4% average reduction in customer visits to target firms’ outlets in the following months. The effect strongly depends on competition. Outlets facing more competition experience significantly larger negative effects. Closer competition matters more, both in terms of geographic and industry proximity. Announcement returns and quarterly accounting revenues around lawsuit filings also strongly depend on competition. Our results suggest that competition is an important component in customers’ ability to discipline firms for misbehavior.

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Abstract We examine the preopening process and price discovery from the offer price to the first open price in initial public offerings. The extent of price discovery during preopening is influenced by firm characteristics and preopening attributes, such as volume of shares executed in preopening, canceled orders, order imbalance, and changes in indicative price. Institutional investors cancel 4 orders for every executed order. Each phase of preopening contributes to incremental price discovery. In “hot” IPOs, almost all price discovery processes occur during preopening, whereas in “cold” IPOs, half of the price adjustment occurs after the market opens.

Abstract Using close to 800,000 transactions by 66,000 households in the United States and close to 2,000,000 transactions by 303,000 households in Finland, this paper shows that, on average, individual investors with longer holding periods choose to hold less liquid stocks in their portfolios. The relationship between holding periods and transaction costs is stronger among more financially sophisticated households. We confirm our findings by analyzing changes in investors’ holding periods around exogenous shocks to stock liquidity. Our findings challenge the notion that individual investors ignore non-salient costs when making investment decisions and suggest that they are cognizant of the cost of trading stocks.