Knowledge that Transforms

Abstract We find that short sellers manage risks by strategically borrowing shares in stocks with significant ownership by passive investors. This practice increases securities lending demand for stocks with substantial passive ownership, resulting in improved price efficiency, higher lending fees, and increased short interest in these stocks. Consistent with the risk mitigation motive, these stocks show reduced risks of unexpected fee hikes and loan recall, longer loan durations, and attract more informed short sellers. These effects are particularly pronounced in hard-to-borrow stocks where short-sale constraints are binding. Our study suggests that passive investing helps alleviate short-sale constraints by reducing the risks associated with stock borrowing.

Abstract We show that callable bonds have both higher yields and lower market prices than matched non-callable bonds of the same issuer-time, reflecting the value of call features to issuers and investors. This “value of callability” as well as the inclusion and the exercise of call rights are jointly determined by issuer credit quality. Critically, our agency-based theoretical and empirical analyses show that callability reduces debt overhang in corporate mergers. Our results help explain the value and increasing prevalence of callable bonds in credit markets.

Abstract This article documents fund usages of insider share pledge loans based on transactions data and subsequent corporate activities in Chinese firms. We find that the market has expanded 111 times since 2003, reaching 2.9 trillion RMB by 2017. The expansion is driven by share pledges for financing firms, including focal listed firms and other firms. Among transactions for financing focal listed firms (17.4 percent), 87 percent of the funds flow into the firms. Each 1 percent increase in controlling shareholders’ ownership is associated with a 7.8–11.7 percent increase in the likelihood of pledging shares to finance the focal listed firms and an additional 2.1–5.7 percent for financially constrained firms. The stock market reacts to transactions for financing focal listed firms with abnormal returns around 0.26–0.65 percent and an additional 0.29–4.37 percent for financially constrained firms. These patterns do not exist for share pledges for other purposes or by noncontrolling shareholders.

Abstract Under a randomized setting, this article finds workers with entrepreneurial ambitions—intended entrepreneurs—are (1) far more common than workers with past entrepreneurial experience and (2) increase the rate of entrepreneurship among their peers. Peer effects are persistent, stronger for tighter networks, and extend to the decision to join a startup. As intended peers explain half of the variation in entrepreneurship rates in our sample, our results demonstrate that intended entrepreneurs, even those that never personally start a firm, represent a vital component of the entrepreneurial ecosystem.

Abstract 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.

Abstract 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.

Abstract 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.

Abstract 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.

Abstract 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.

Abstract 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.