Knowledge that Transforms

Abstract This article studies the disclosure of stress test results by a regulator who is privately informed about bank health when she chooses the stress scenario. I show that the regulator’s choice of the stress scenario depends on how heterogeneous health is across banks. There can be fewer runs than under transparency. However, there are more runs than when the regulator chooses the scenario before becoming informed, highlighting a time-inconsistency problem. Moreover, disclosure can become a source of informational contagion, as changes in the health of one bank affect beliefs about other banks. The model explains the empirical puzzle that a bank’s share price can fall even though it passes the stress test.

Abstract Corporate scandals cause employee sentiment to fall sharply and persistently, driven by diminished perceptions of firm culture and management. Workers are not compensated for this loss in job satisfaction, as neither base nor variable pay rise. In fact, employees are six percentage points less likely to receive variable pay and those who do see it decline by an average of 10 percent. We also find suggestive evidence that corporate scandals induce voluntary turnover, particularly for longer-tenured workers. Together, our results demonstrate that rank-and-file employees are not insulated from organizational wrongdoing.

Abstract I examine the role of banking competition for transmission of incentives to the creation of innovative firms. Exploiting the 2012 Start-Up Italy Act, designed to foster firm creation through public bank guarantees, I document that the policy increased the creation of innovative firms by 24 percent between 2012 and 2015, but only in provinces where banking competition is stronger. Weaker banking competition leads to less guaranteed lending, fewer venture capital deals and lower leverage for these firms, resulting in higher entrepreneurial migration. The findings suggest that bank market power plays a crucial role in shaping the market for entrepreneurial finance.

Abstract Theory offers conflicting predictions on how bank specialization affects corporate innovation. We show that the sign and magnitude of this effect vary with the degree of “asset overhang” across sectors—the risk that new technologies reduce the value of banks’ legacy loan portfolios. Using Belgian innovation survey data and US patent data, we find that lenders’ sectoral specialization enhances innovation for firms operating in sectors with low asset overhang, but hinders innovation in sectors with high asset overhang. These findings are robust to different measures of asset overhang and an identification strategy using bank mergers. We further show that these heterogeneous effects arise through financial contracting. Our findings highlight how product market characteristics shape the role of bank specialization in innovation.

Abstract We evaluate the effects of environmental regulation on corporate innovation and real outcomes. Exploiting plant-level regulatory shocks induced by the 1990 Clean Air Act Amendments, we identify firms’ exposure to stricter environmental standards based on whether their plants emit newly regulated pollutants in counties designated as nonattainment. We show that firms more heavily exposed to the regulatory shock increase green innovation, including green process and green product patents, with no corresponding changes in nongreen patenting. The innovation-enhancing effects are concentrated among firms in industries with low external finance dependence and are stronger in areas with more intensive environmental enforcement. In addition, employment declines in response to the regulatory shock, and the effects are more pronounced among firms relying heavily on external finance. Overall, the results support the Porter hypothesis while highlighting the roles of financial capacity and enforcement intensity in shaping firms’ innovation and labor responses to environmental regulation.

Abstract We study the long-term impact of limited attention on belief formation. To this end, we propose a rank-dependent model of inattentive learning, building on principles from the behavioral science literature. We provide explicit formulas for the distorted limiting beliefs and the asymptotic variance that characterizes the speed of learning. In our model, agents who pay excessive attention to extreme observations end up learning a distorted version of the true data-generating process which puts too much weight on the tails of the distribution. We show how the implications of our model can be linked to empirically documented phenomena such as skewness-seeking behavior and the coexistence of over- and underreaction to incoming information depending on the context. Limited attention can thus have long-lasting impacts on the beliefs agents form.

Abstract Using the adoption of Zombie Property Laws (ZL) across several US states, we show that requiring lenders to maintain properties in the foreclosure process affects mortgage lending decisions and standards. Difference-in-differences estimations using a state border design show that ZL incentivizes lenders to screen mortgage applications more carefully: they deny more applications and impose higher interest rates on originated loans, especially risky loans. In turn, these loans exhibit higher ex post performance. ZL also affects lender behavior after borrowers become distressed, causing them to strategically keep delinquent mortgages alive. Our findings inform the debate on policy responses to foreclosure crises.

Abstract I analyze the effect of non-compete agreements (NCAs) on the allocation of inventors across product markets. NCAs constrain the within-industry employment choice set of inventors. In a staggered difference-in-differences, I show causal effects that two in hundred inventors per year (increase of 42 percent) respond to more enforceable NCAs by moving to more distant product markets. Across-industry mobility is largest for inventors likely bound by NCAs. Within-industry mobility on the other hand is reduced. Reallocated inventors are subsequently less productive and there is a lower quality match between inventors and their new employers. I highlight how product market choice set constraints can have detrimental effects through reallocation of human capital to more distant product markets.

Abstract We survey portfolio companies of a large asset owner to explore the evolving landscape of nature risks. Nearly half of all companies (48 percent) view nature risks as financially material, and 43 percent of those perceive nature-related physical risks, and 27 percent transition risks, as having financial effects already today. Three-quarters of companies experiencing nature-related investor engagement view these interactions as value-generating. Nonetheless, according to the respondents, investor attention remains limited in key respects: while 40 percent report that investors consider nature risks, fewer than 25 percent believe investors assess how these risks affect cashflows or costs of capital. Half of the respondents believe investors will prioritize climate over nature; however, many think both topics are so intertwined that they cannot be separated. Our findings underscore the growing recognition of nature risks as financially relevant, while also pointing to challenges and opportunities for their integration into financial analysis and investor engagement.

Abstract We study the impact of financial advice on retirement savings. We document that advisors help clients to prepare for retirement by inducing them to take advantage of tax incentives offered on retirement accounts. Advisors particularly promote retirement funds as compared to savings accounts. After-tax returns of advisor-induced retirement fund investments exceed returns of plausible alternative investments. We find no indication that advisor-induced contributions to retirement accounts lead to negative side effects, such as reductions in other savings or liquidity constraints. Hence, we provide evidence of a bright side of financial advice. Furthermore, investments in retirement funds increase bank profits, pointing toward a win–win situation with rent-sharing between the bank and its clients. However, advisors do not in particular target clients that are at a higher risk of under-saving for retirement, such as female clients, clients with lower wealth, and less-educated clients.