Knowledge that Transforms

The sensitivity of the external finance premium to firms’ net-worth-to-capital ratio is central to the strength of the financial accelerator, yet direct firm-level evidence remains scarce. We estimate this elasticity using balance sheet and income statement data for Swiss nonfinancial firms over 1998–2016. To address the endogeneity of net worth, we employ two complementary instrumental variable strategies: one based on firms’ non-operating income and the other a shift-share design that interacts predetermined exposure to financial income with aggregate dividend returns. Mapping the estimated elasticity into the costly state verification framework as implemented by Bernanke et al. (1999) yields structural monitoring costs of about one quarter of firms’ gross return on capital, with estimates ranging from 0.15 to 0.35 across specifications. Our results provide direct firm-level support for the financial accelerator mechanism and imply monitoring costs of the same order of magnitude as the benchmark calibration of Bernanke et al. (1999).

We examine the causal effects of a policy allowing early withdrawal of pension funds on individuals’ investment behavior. Upon turning 55, eligible individuals may withdraw a portion of their pension savings. Using detailed brokerage data, we find that this liquidity access triggers increased trading of 9% to 33%, especially in riskier, leveraged assets, without improving investment performance. The resulting increase in trading costs and portfolio volatility, particularly among males and lower-income investors, ultimately diminishes retirement wealth.

This study estimates analyst-level stickiness in forecast updating and investigates its underlying determinants. Consistent with recent experimental findings on belief updating under cognitive noise, analysts often compress their forecasts toward an intermediate default, such as prior forecasts, when uncertain about forecast precision, leading to forecast stickiness. This tendency is more evident among analysts with characteristics associated with higher cognitive noise, including lower forecast accuracy, limited experience, and complex portfolio coverage, and during periods of heightened macroeconomic uncertainty. A model incorporating sticky updating behavior shows that the consensus revision by sticky analysts exhibits stronger return predictability than the traditional consensus revision by all analysts, with this predictability increasing with the proportion of sticky analysts covering a stock. Empirical evidence supports these predictions. Additionally, the return predictability of sticky revisions is especially pronounced when forecast difficulty is elevated. Analyst-level stickiness provides more information about the cross-section of stock returns than firm-level stickiness.

The idea of separating retail and investment banking remains controversial. Exploiting the introduction of UK ring-fencing requirements, we show that this separation has a range of previously undocumented side effects for credit supply, competition, and risk-taking in credit markets not directly targeted by the reform. By redirecting the benefits of deposit funding toward retail activities, ring-fencing incentivises universal banks to expand mortgage lending. This rebalancing reduces the cost of household credit, without eroding lending standards. But it also increases mortgage market concentration, pushes smaller banks toward riskier lending, and is mirrored by a reduction in syndicated loans and credit lines.

This article explores the relationship between a firm’s legal contracting environment and its innovation incentives. Using granular data from the pharmaceutical industry, we examine a contracting mechanism through which incumbents maintain market power: “pay-for-delay” agreements to delay the market entry of competitors. Exploiting a shock where such contracts become legally tenuous, we find that affected incumbents subsequently increase their innovation activity across a variety of project-level measures. Exploring the nature of this innovation, we also find that it is more “impactful” from a scientific and commercial standpoint. The results provide novel evidence that restricting the contracting space can boost innovation at the firm level. However, at the extensive margin we find a reduction in innovation by new entrants in response to increased competition, suggesting a nuanced effect on aggregate innovation.

In the Australian real estate market, about a third of properties are sold at auction. Properties that fail auctions sell later for a 1.3 percent discount. Consistent with a causal channel, the effect holds with property-level fixed effects and when auction failure is instrumented by adverse weather or seller overvaluation. Prices cluster below round numbers, and the discount fades over time, inconsistent with our effects reflecting unobserved property characteristics. The evidence suggests that there are behavioral factors affecting the valuations of buyers and sellers.

Using data from a Twitter-like investor social platform, we document evidence consistent with self-enhancing transmission bias. We find investors are more likely to post about their better-performing stocks. Their followers are more likely to buy the posted stocks than other non-posted stocks. The effect of the postings on follow-up purchases is consistent with an attention-based interpretation: the postings bring the discussed stocks into the followers’ choice set and increase their purchases. We also find that postings’ effect on follow-up purchases is related to postings’ perceived credibility. The performance-postings relationship is stronger among more volatile stocks and the relationship between postings and follow-up purchases is stronger among stocks with higher recent returns, shedding light on the spread of high-variance and extrapolative strategies. We also document that the social network features influential nodes.

The paper introduces a novel two-beta currency pricing model, which decomposes the conventional dollar factor beta into a beta with risk-premium news and a beta with real-interest-rate news. These betas capture distinct features of currency returns and explain cross-sectional variations in currency risk premiums. The risk-premium beta is associated with an unconditionally positive price of risk, while the real-rate beta has an unconditionally negative price of risk due to precautionary savings. The prices of these beta risks exhibit conditional variations tied to economic conditions. Furthermore, the model explains the abnormal performance of various currency trading strategies.

Abstract …is “should I buy any?”. Under Bayesian portfolio theory, ongoing zero weights in cryptocurrency are surprisingly difficult to generate. With 10 years of prior data, equity investors would need very pessimistic priors on mean returns to never buy cryptocurrency: −10.6 percent per month for Bitcoin, and −19.6 percent for a diversified cryptocurrency portfolio. Most priors that involve never purchasing cryptocurrency imply shorting it. Optimal weights are generally small, non-trivial (1–5 percent magnitude), frequently positive, and smooth. The certainty equivalent gains from cryptocurrency are comparable to international diversification and prominent anomaly portfolios. Costs (storage and fees) would need to exceed 21–39 percent annually to deter trading.