Knowledge that Transforms

How can managers be incentivized to create both financial and social value? Since managers can anticipate how their decisions impact social performance metrics, they may game a compensation scheme based on these measures. Nevertheless, the optimal compensation contract still incorporates social performance metrics when the board’s preferred level of social investment exceeds the level that maximizes the stock price. In this case, gaming distorts social investments, and the sensitivity of pay to social performance is reduced to mitigate this effect. When multiple independent social performance measures are available, the inefficiencies caused by gaming can be alleviated. Our findings suggest that efforts to harmonize social performance measurement may have unintended negative consequences.

We investigate the importance of time-varying discount rates for commodity prices using an index based on twenty-three commodities for the period 1959–2024. We show that in commodities markets, unlike other financial markets, time variation in discount rates plays a much smaller role. Instead, prices forecast cash flows as well as discount rates. A high price for a commodity today, measured as a low percentage net convenience yield, forecasts both a high future convenience yield and a low expected return. For longer horizons, variation in percentage net convenience yields seems mainly driven by net convenience yield growth, making commodities much closer to the classical textbook view of price changes representing news about cash flows.

We construct tradable risk factors using combinations of large and liquid mutual funds (long leg) and ETFs (exchange-traded funds) (long and short legs), based on their holdings, for both retail and institutional investors. Exploiting a novel dataset, our tradable factors take into account ETF shorting costs. Assessing the performance of our tradable factors against standard “on-paper” factors, we uncover an implementation shortfall of 2–4 percent annually. Shorting fees and transaction costs contribute to 58 percent of the performance differential between tradable and “on-paper” factors, assigning a non-trivial role to the opportunity cost of not trading the exact “on-paper” portfolio.

Institutional investors affected by hurricanes subsequently support environmental proposals in non-affected firms even if they never voted for similar initiatives. Affected investors raise their holdings in firms where their pro-environment votes are consequential. The increased voting support after hurricanes has real effects as environmental proposals endorsed by more hurricane-afflicted investors are more likely to pass. Moreover, both market capitalization and analysts’ recommendations decline after firms pass environmental proposals. Our evidence suggests that natural disasters raise institutional investors’ concerns about the environment and about potential fund flow disruptions. These concerns, in turn, influence environmental activism, corporate policies, and firm performance.

Using unique data on Italian households from 2011 to 2015, we examine how investor demand-side and bank supply-side characteristics relate to households’ holdings of bonds issued by their own bank. Households with a higher concentration of own bank bonds tend to have a lower education level, a shorter investment horizon, and less wealth. Controlling for investment and investor attributes, households exhibit high bank bond concentration when the issuing bank has high funding needs, low profitability, or a high branch market share. Furthermore, we show that a buy-and-hold strategy on bank bonds yields lower returns than one on government bonds over the same period. These findings offer insights into retail bond issuance, an important source of funding for banks in times of market stress.

Using a comprehensive dataset of privacy policies, firm characteristics, consumer tracking, and cybersecurity incidents, we document several stylized facts about the heterogeneity of firms’ data extraction practices and the influence of privacy regulations. Rather than adopting standardized boilerplate privacy policies, we find substantial within-industry differences correlated with firms’ technical sophistication; firms engaging in data extraction have lengthier policies, seeking to hedge legal risks. Firms with intermediate technical sophistication appear to follow a “collect and share” model, collecting large amounts of consumer data and sharing it with third parties for processing, thus creating cybersecurity risks. Conversely, high sophistication firms appear to implement a “receive and process” model, consistent with a two-tier data market in which data flow from intermediate to high sophistication firms.

This article examines whether more bank presence in underserved areas can improve households’ health. Leveraging a 2005 Reserve Bank of India policy and a regression discontinuity design, I demonstrate that 5 years post-policy, treatment districts have twenty-seven more bank branches than control districts. This expansion increases household employment and access to savings accounts, enhancing health investments. On the healthcare supply side, hospitals utilize more credit and expand services. Six years after the policy, households in treatment districts are nineteen percentage points less likely to suffer from non-chronic illnesses in a given month. Chronic diseases remain unaffected.

I study the effects of regulatory policy changes on interest rate option prices: margin tightening from the introduction of mandatory interest rate swap clearing by the Dodd–Frank Act in 2010 and margin loosening from the counterbalance of voluntary swaption clearing and synthetic derivatives to the uncleared margin rule in 2016. Employing these variations as exogenous shocks for a quasi-experimental design, I show that swaption prices consistently respond to changes in margin requirements. The results are consistent with theories on the expected margin premium, where the constrained agent holds short positions in zero net supply.

We model the execution of a large uninformed sell order in the presence of strategic competitive market makers. We solve for the unique symmetric equilibrium of the model in closed form. Analysis of this equilibrium reveals that large orders unequivocally benefit market makers, while smaller investors stand to benefit only if the order trades with a sufficiently high intensity. The equilibrium results further provide a rationale for the empirically observed patterns of (1) shorter orders trading at higher intensities and (2) price pressures potentially subsiding before large orders stop executing.

A long-standing question in finance is why companies donate to charity, often attributing it to either managerial agency problems or strategic behavior. Based on a global sample of donation announcements by firms providing relief to disaster-affected communities, we test the relative importance of these two motives and the conditions under which each dominates. We exploit disaster-specific factors in an event study setting around corporate donation announcement dates to show that, on average, relief donations decrease returns. However, the strategic benefits of donating around salient events can mitigate these negative effects. To account for firms’ donation decisions, we rely on exogenous variation in the availability of corporate charitable funds due to the timing of disasters relative to firms’ financial years. We show that donations provide new information to the market and that negative returns are primarily driven by cash donations made via corporate foundations.