Knowledge that Transforms

Central banks increasingly disclose their private information regarding the economy’s current and future state (CBET). Consistent with CBET shifting investors’ collection and pricing of aggregate-level (where managers do not have an information advantage) toward firm-level (where managers do have an information advantage) information, we find that CBET reduces managers’ learning from stock price. The results are (1) pronounced when firms do not provide guidance and when noise trading in firms’ stock is low, and (2) robust to using the 2013–2014 amendments to the Bank of England’s Inflation Report as an exogenous shock. Additional evidence suggests that CBET lowers investment efficiency.

Using résumé data on over 20 million U.S. workers, we find that the flow of employees between a pair of firms sharply drops by about 20% during periods in which the firms share a board director. This relationship is stronger in settings where firms have greater potential gains from limiting worker mobility and is most pronounced for higher-skilled employees. Moreover, we find more connected firms have lower rates of internal promotion and no improvements in employee satisfaction. The evidence is consistent with shared directors serving as a mechanism for labor market coordination.

We introduce a nonlinear covariance shrinkage method for building optimal portfolios. Our universal portfolio shrinkage approximator (UPSA) is built from closed-form basis portfolios, is cheap to implement, and improves on existing shrinkage methods. Rather than uniformly penalizing all principal components of returns or discarding low-variance ones, UPSA instead reweights components to explicitly optimize expected out-of-sample portfolio performance. In empirical applications using a large cross-section of anomaly factors, it delivers robust improvements over alternative shrinkage methods in the literature.

Using the Duke Survey data on firms’ internal plans, we show that over 80% of Chief Financial Officer (CFO) forecasts align closely with simple heuristics taught in MBA textbooks. We introduce forecast coherence—internal consistency across forecasts of jointly determined variables—as a benchmark for evaluating these heuristics. Nearly half of CFOs issue forecasts closely aligned with incoherent heuristics. Such forecasts are associated with predictable reversals in forecast errors, lower firm performance, and underinvestment. We develop a parsimonious model illustrating how reliance on restricted forecasting heuristics can generate incoherence and resource misallocation within firms, consistent with our evidence

We examine how corporate financial constraints shape firms’ employment responses to minimum wage policies. Exploiting the federal minimum wage increase during the financial crisis and variation in firms’ debt maturity structures at the crisis onset, we find that financially constrained firms significantly reduce employment. To assess external validity, we analyze staggered state-level minimum wage increases over time. Consistent with the crisis evidence, employment declines in establishments of constrained firms, whereas unconstrained firms expand in areas with a larger supply of minimum-wage workers and higher turnover. Our results highlight the central role of financial constraints in mediating labor policy effects.

We study how firm-level carbon emissions affect bank lending and real outcomes in a sample of global firms with syndicated loans. We exploit bank-level climate commitments as firm-level shocks to lending relationships, using firms' prior credit exposures to identify credit supply effects. Firms with higher emissions that previously borrowed from committed banks receive less bank credit. Evidence from lending volumes, prices, and within-firm-time loan-level data indicates a supply-side shift away from high-emission firms, not explained by borrower risk. Affected firms reduce debt, leverage, size, and investment, yet we find no reduction in future emissions, instead documenting evidence consistent with greenwashing.

Why do so few women become CEOs? To understand this glass ceiling, we estimate a dynamic model of the CEO gender decision, which contains perceived gender productivity differences, search costs reflecting limited female labor supply, and employer disutility from discrimination. The key factor is the shortage of suitable female candidates, as boards prefer hiring women, and productivity differences between genders are minimal. We find no evidence of a glass cliff in which women become CEOs just as firms are failing. While better governance is associated with women becoming CEOs, the importance of limited female labor supply is unrelated to governance.

Our study provides the first causal test of classical and behavioral asset pricing models that incorporate skewness pricing. In line with these models, our experimental markets show that skewness is systematically priced. Our findings also reveal that positively skewed assets available in small supply exhibit negative expected returns, which is consistent with prospect theory, but not with expected utility models. Furthermore, in line with the mechanism underlying prospect theory, we show that the negative returns of the positively skewed asset are most pronounced during market sessions where traders overweight the low probability of receiving a large payoff.

Traditionally, fund managers cast votes on behalf of fund investors. Recently, there is a shift toward “pass-through voting,” with funds offering investors a choice: delegate votes to the fund or vote themselves. We develop a framework to study the implications of voting choice. While it helps reflect heterogeneous investor preferences, it also shapes the informational content of the vote, and these forces can conflict. When interests are aligned, voting choice improves information aggregation and investor welfare. With preference heterogeneity or costly information, however, it can make investors worse off by weakening informed.

We present and discuss the papers in this special issue. We use the themes that these papers study to illustrate interesting new directions that are being pursued in the household finance literature and highlight open questions on which more work is needed.