Knowledge that Transforms

How are contracts structured in the presence of relationship-specific investments when legal enforcement is weak? Using a new audit methodology, we show that simple financial contracts in combination with social norms and reputation concerns can sustain relationship-specific transactions. Wholesalers in the market for pens in India use upfront payments rather than increased risk premiums to mitigate risks arising from relationship-specific investments. Upfront payments for printed pens cover only 40 percent of the production costs, highlighting the importance of upfront payments as a screening device. Ex-post, renegotiation is more likely for printed pens, but in a substantial fraction of cases, renegotiation fails.

Using exogenous shocks on the ability to issue seasoned equity offerings (SEOs), we show SEOs lead to a higher employee skill composition, that is, a lower (higher) proportion of low (high) skilled workers. The decrease in low-skilled workers exceeds the increase in high-skilled workers, resulting in reduced employment at the firm level. These effects are more significant when firms invest more in technology following SEOs and face greater financial constraints before SEOs, suggesting that SEOs relieve budget constraints on technology investments. These findings demonstrate that while external equity financing helps upgrade technology to improve productivity, it has a dark side for low-skilled workers.

We assemble a property-level panel of appraiser-reported attributes associated with 4.6 million loan applications from 2013 to 2017 to test whether attributes were consistently reported. Appraisers have an incentive to misreport property attributes to justify higher appraised values to ensure that associated mortgage loans are approved. We focus on property transactions with multiple sets of attributes reported by the same appraiser within four quarters and find evidence consistent with an intent to inflate valuations through attribute misreporting. We find that strategic misreporting of attributes is prevalent across markets, and that highly leveraged borrowers whose appraisals had inconsistently reported attributes were 9.8 percent more likely to become seriously delinquent in their loan payments.

Many policymakers and practitioners argue that corporations may become more stakeholder focused if employees are given more power. We study the causal impact of unionization on stakeholders by analyzing how close labor union elections affect environmental and social (E&S) scores. We find that unionization is associated with an increase in internal social scores that primarily benefit employees and a decrease in external E&S scores that primarily benefit non-employees. The negative effects on external E&S are amplified when firms have greater financial constraints. The effects on both internal and external E&S are magnified when labor unions have more bargaining power. Our results suggest that policymakers consider implications for all stakeholders before implementing policies that prioritize the corporate influence of one stakeholder group.

We identify a comprehensive list of thirty-eight characteristics for predicting cross-sectional FX options returns. We find that three factors—long-term straddle momentum, implied volatility, and illiquidity—can generate economically and statistically significant risk premia not explained by other return predictors. Meanwhile, the predictability of the other characteristics becomes insignificant after accounting for the FX option three-factor model. The significance of the three factors is confirmed through a series of robustness tests covering different data sources, alternative options strategies, diversification effects, bootstrapping, and omitting crisis years.

We estimate the willingness-to-pay to bypass a loan-to-value (LTV) cap. Our identification relies on exogenous variation in debt exempt from the LTV regulation that can only be used as a substitute for a personal mortgage. Our baseline estimate reveals that homebuyers pay 7.3 Swedish Kroner (SEK) to avoid 1 SEK of equity down payment. The supply of debt not part of the LTV calculation increased by approximately 50% within 2 years after the LTV regulation. Financially weaker households drive the results.

The US Securities and Exchange Commission’s mandated CEO pay ratio is a simple, but salient, metric that could resonate with employees given it focuses on their compensation. Reporting a relatively or surprisingly high ratio reduces employee perceptions of their pay, views of the CEO, and hampers productivity growth. Employee pay satisfaction drops after disclosing a high ratio even if their wages were previously disclosed and when the pay ratio disclosure adds little new information. Disclosures by firms with a high ratio contain more discretionary language to explain the ratio or portray employee relations positively and are more likely to be covered by the media. However, neither information source substantially alters the employee response to a salient ratio. Our work illustrates that requiring firms to disclose a salient metric can have unintended consequences on employees and suggests caution in requiring firms to report simplified Environmental, Social, and Governance (ESG) metrics that are inherently multifaceted.

We study a model for portfolio selection under uncertainty along with market equilibria that are associated with the optimal positions. Allowing for both ambiguity-seeking and ambiguity-averse market participants, model-implied demand functions resemble observed bid–ask spreads, and are consistent with extant limited-participation results based on more specialized ambiguity settings. A Pareto-efficient second-best equilibrium arises from constraining the portfolio allocations of ambiguity seekers. It implies that heterogeneity in ambiguity preferences is sufficient for mutually beneficial transactions even among all else homogeneous traders. Our results reconcile many observed phenomena in liquid high-information financial markets, such as portfolio inertia and negative risk premia.

The decrease in companies going public has received widespread attention, and the associated costs are widely debated. We document that high local initial public offering (IPO) activity leads to increases in stock market participation of 5–6 percent. This is striking, given that such participation represents a key factor toward building wealth. Local IPOs increase both households’ propensity to own stock and their percent equity holdings. The attention channel drives effects: local IPOs attract attention to the market, through increased information production and publicity. The wealth channel has little influence, consistent with local IPOs not generating wealth shocks for most households.

We examine the effect of the composition of the board of directors on the firm’s chief executive officer (CEO) hiring decision. Using a novel measure of managerial talent, characterized by an individual’s ascent in the corporate hierarchy, we show that firms with non-CEO inside directors tend to hire CEOs with greater managerial skills. This effect obtains for both internal and external CEO hires; moreover, the effect is pronounced when inside directors have stronger reputational incentives and limited access to soft information about the candidate. Our findings demonstrate that boards with inside directors more effectively screen for managerial talent, thereby improving the CEO hiring process.