We examine whether equity issuances initial public offerings (IPOs) and seasoned equity offerings (SEOs) are in part driven by investor sentiment by using equity mutual fund flows to proxy for the rational and/or irrational components of aggregate demand for equity. We find that more firms issue equity when flows are higher and repurchase equity when flows are lower. More firms file with the Securities Exchange Commission when predicted flows in the expected issuance month are greater. Price revisions are positively related to contemporaneous flows and unexpected flows. Initial returns are positively related to contemporaneous flows only for IPO issuances. These results are driven by retail, and not institutional, flows. Our evidence suggests that investor sentiment partially drives equity issuances.

This article uses the 2007–09 financial crisis as a negative liquidity shock on banks in the USA and analyzes its transmission to the real economy. The ex ante heterogeneity in the amount of long-term debt that matured during the crisis is used to measure the variation in banks’ exposure to the liquidity shock. I find that banks transmitted the liquidity shock to the real economy by reducing their loan supply. The reduction was particularly strong for real estate loans. As a result, house prices declined in the MSAs where these banks have branches. Bank capital plays a significant role in the transmission: under-capitalized banks transmitted the liquidity shock, whereas well-capitalized banks’ lending did not show any decline.

How should long-term investors form portfolios in our time-varying, multi-factor and friction-filled world? Two conceptual frameworks may help: first, look directly at the stream of payments that a portfolio and payout policy can produce. Second, include a general equilibrium view of the markets’ economic purpose, and the nature of investors’ different preferences, risk-taking ability, and function in that equilibrium. These perspectives can rationalize some of investors’ behaviors, suggest substantial revisions to standard portfolio theory, and help us to apply portfolio theory in a way that is useful in practice.

Macro-finance addresses the link between asset prices and economic fluctuations. Many models reflect the same rough idea: the market’s ability to bear risk is greater in good times, and less in bad times. Models achieve this similar result by quite different mechanisms. I contrast their strengths and weaknesses. I highlight directions for future research, including additional facts to be matched, and limitations of the models that should prod future theoretical work. I describe how macro-finance models can fundamentally alter macroeconomics, by putting time-varying risk premiums and risk-bearing capacity at the center of recessions rather than variation in the interest rate and intertemporal substitution.

Using an arbitrage approach,

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.

Evidence indicates that people fear change and the unknown. We model this behavior as familiarity bias in which individuals focus on adverse scenarios in evaluating defections from the status quo. The model explains portfolio underdiversification, home and local biases. More importantly, equilibrium stock prices reflect an unfamiliarity premium. In an international setting, our model predicts that while the standard CAPM fails to hold with respect to the world market portfolio, a modified CAPM holds wherein the market portfolio is replaced with a portfolio of the stock holdings of investors not subject to familiarity bias.

We design a compound real options model, which determines the timing of takeovers and characterizes the distribution of the associated surplus. We delineate a relation between the bargaining power of the acquiring firm and the takeover incentives. The takeover threshold is decreasing as a function of the expected primary takeover gain and the embedded divestment gain. Decreased implementation uncertainty stimulates takeover activity. This uncertainty concerns the delay until either primary takeover synergies or subsequent divestment gains are realized. We demonstrate how the relation between volatility and takeover timing depends on the functional form of the profit flow with implementation uncertainty.

This article analyzes the relationship between consumer bankruptcy patterns and the destruction of soft information caused by mergers. Using a major Canadian bank merger as a source of exogenous variation in local banking conditions, we show that local markets affected by the merger exhibit an increase in consumer bankruptcy rates post-merger. The evidence is consistent with the most plausible mechanism being the disruption of consumer–bank relationships. Markets affected by the merger show a decrease in the merging institutions’ branch presence and market share, including those stemming from higher switching rates. We rule out alternative mechanisms such as changes in quantity of credit, loan rates, or observable borrower characteristics.

We examine the causal impact of public-sector spending on corporate investment. Making use of population count revisions in census years as exogenous shocks to the cross-sectional allocation of federal funds, we find that increases in federal spending reduce firms’ investment, R&D spending, employment growth, sales growth, and firm-level equity volatility. The effect is stronger for firms that are labor-intensive, smaller, geographically concentrated, financially constrained, or in regions with higher employment or more generous unemployment insurance benefits. We find that exogenous increases in government hiring reduce corporate hiring, and positive federal spending shocks reduce the flow of workers from the public-sector to the private sector. Overall, our results show that positive government spending reduces corporate investment by hurting firms’ investment opportunity sets and highlight the significant role of the labor market as an underlying mechanism.