Knowledge that Transforms

Abstract 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.

Abstract The more trust investors place in a money manager, the more confident they are to take risk. We test this theory in a laboratory experiment using the amount returned from a trust game as measure of trustworthiness. Investors increase the share invested in risky assets with high-cost money managers compared to those with low costs when the high-cost money managers are more trustworthy than the low-cost ones. The willingness to take more risk with high-cost money managers is increasing in the difference in trustworthiness. Up to a third of the difference in trustworthiness translates into an increasing risky share. Vice versa, investors are willing to accept higher costs for investments made through more trustworthy money managers. Our findings are robust to alternative explanations, demonstrating that the risk-aversion channel can be sufficient for trust to influence behavior.

Abstract This article proposes an innovative method to assess borrowers’ creditworthiness in consumer credit markets by conducting machine-learning-based analyses on real-time video information that records borrowers’ behavior during the loan application process. We find that the extent of borrowers’ micro-facial expressions of happiness is negatively associated with loan delinquency likelihood, while the degree of fear expressions is positively associated with delinquency risk. These results are consistent with two economic channels relating to the adequacy and uncertainty of borrowers’ future income, drawn from the extant psychology and economics literature. Our study provides important practical implications for fintech lenders and policymakers.

Abstract In four large online experiments, we study how investors assess the relationship between stock portfolios and the market. Participants select or are randomly assigned a portfolio of stocks from a market index. They state portfolio return expectations conditional on different market outcomes, revealing implied beliefs about portfolio beta. We find general underestimation of beta which is stronger for downside beta. This asymmetry is amplified for participants who select their portfolio. They believe their portfolio goes up with the market but does not come down with it. We confirm biased beliefs about beta with financial professionals, monetary incentives, and alternative belief elicitation methods.

Abstract 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.

Abstract Although momentum exists in many markets throughout the world, explanations for momentum have largely been tested using US data. We investigate the extent to which US-based momentum explanations extend to the international context, using regression-based and portfolio approaches. Among the several hypotheses we consider, we find reliable support for the hypothesis that due to limited attention, investors underreact to information arriving in small bits rather than in large chunks, which results in momentum. We also find secondary support for the overconfidence hypothesis for momentum. Finally, we find that momentum is stronger in up-markets and less-volatile markets in the international context just as in the USA. This finding also accords with the investor overconfidence hypothesis, under the proviso that investors are more confident in rising, low-volatility markets.

Abstract In the USA, state-level exemptions determine the amount of property that individuals can protect from creditor liquidation during the debt settlement process. We exploit within-metropolitan statistical area variation in personal bankruptcy exemptions created by state borders and a stacked regression approach to identify the spillover effects of these laws on business credit extended to small firms. Subsequent to exemption increases, we find a reduction of 1–2 percent in originations of business credit. The effect is strongest for the smallest firms, which are more financially constrained. We provide household-level evidence that both business debt and personal debt decline for borrowers whose home equity becomes covered by the exemption, suggesting an overall decrease in credit availability for small businesses. As a result, increases in exemptions lead to fewer small establishments and lower employment, especially in industries dependent on external finance, suggesting that negative real economic effects occur via a credit market channel.

Abstract 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.

Abstract We document that firms experience large negative stock returns during, and positive returns following, the first informational events after forced CEO turnovers. This V-shaped return pattern is driven by the strategic sequential disclosure of bad news and good news, aligned with incoming CEOs’ incentives to manage expectations. The pattern is more pronounced when these incentives are stronger, such as when firms earn higher stock returns and have higher valuation uncertainty leading up to the informational events. Evidence from firms’ earnings surprises, analysts’ forecast revisions, and large language model-based measures of disclosure behavior indicates that incoming CEOs often initially release bad news about realized and short-term earnings, projecting a broadly pessimistic outlook for the firm’s future performance, and subsequently disclose favorable news about longer-term earnings prospects. Our findings suggest that investors make the costly mistake of failing to discern the incentives behind managers’ disclosure.

Abstract We study the causal effects of precommitment framing, motivational deadlines, and semi-personalized information on military servicemembers’ retirement savings using a randomized field experiment. Low-cost emails highlighting a motivational deadline or semi-personalized salary information increased participation by about 1 percentage point (control mean is 1.25 percent) and contribution rates by about 0.05 percentage points (control mean is 3.92 percent) among previous non-participants. These programs demonstrate a cost-effective and scalable tool by which managers can increase employees’ retirement savings.