Knowledge that Transforms

What is the effect of cash injections during financial crises? Exploiting county-level variation arising from random weather shocks during the 1980s Farm Debt Crisis, we analyze and measure the effect of local weather-driven cash flow shocks on the real and financial sectors. We show that such cash flow shocks significantly affect a host of economic outcomes, including land values, loan delinquency rates, the probability of bank failure, employment, and wages. Estimates of the effect of local cash flow shocks on county income levels during the financial crisis yield a multiplier of 1.63.

We exploit historically determined variation in local credit markets to identify the impact of bank lending on innovation across Russian firms. We find that deeper credit markets increase firms’ use of bank credit, their adoption of new products and technologies, and their productivity growth. This relationship is more pronounced in industries farther from the technological frontier, more exposed to import competition, and that export more. These impacts are also stronger for firms near historical R&D centers or railways and in regions with supportive institutions. Consistent with these results, credit markets contribute to economic growth in such regions. Authors have furnished a data set, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Using a comprehensive database of coastal home sales merged with data on elevation relative to local tides, we compare prices for houses based on their inundation threshold under projections of sea level rise. The analysis separates the sensitivity of housing to rising seas from other confounding characteristics by exploiting cross-sectional differences in relative sea level rise due to vertical land motion. This provides variation in the expected time to inundation for properties of similar elevation and distance from the coast. In a variety of specifications and test settings, we find precisely estimated null results suggesting limited price effects.

Initial coin offerings (ICOs) have emerged as a new mechanism for entrepreneurial finance, with parallels to initial public offerings, venture capital, and presale crowdfunding. In a sample of more than 1,500 ICOs that collectively raise $12.9 billion, we examine which issuer and ICO characteristics predict successful real outcomes (increasing issuer employment and avoiding enterprise failure). Success is associated with disclosure, credible commitment to the project, and quality signals. An instrumental variables analysis finds that ICO token exchange listing causes higher future employment, indicating that access to token liquidity has important real consequences for the enterprise. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

The deregulation of securities laws—in particular the National Securities Markets Improvement Act (NSMIA) of 1996—has increased the supply of private capital to late-stage private startups, which are now able to grow to a size that few private firms used to reach. NSMIA is one of a number of factors that have changed the going-public versus staying-private trade-off, helping bring about a new equilibrium where fewer startups go public, and those that do are older. This new equilibrium does not reflect an initial public offering (IPO) market failure. Rather, founders are using their increased bargaining power vis-à-vis investors to stay private longer.

Most anomalies fail to hold up to currently acceptable standards for empirical finance. With microcaps mitigated via NYSE breakpoints and value-weighted returns, 65% of the 452 anomalies in our extensive data library, including 96% of the trading frictions category, cannot clear the single test hurdle of the absolute t-value of 1.96. Imposing the higher multiple test hurdle of 2.78 at the 5% significance level raises the failure rate to 82%. Even for replicated anomalies, their economic magnitudes are much smaller than originally reported. In all, capital markets are more efficient than previously recognized. Received June 12, 2017; editorial decision October 29, 2018 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

If the asset market is complete, then the difference between foreign and domestic agents’ log intertemporal marginal rates of substitution (IMRSs) equals the log change in the real exchange rate. This equation is frequently used to argue that changes in real exchange rates reflect differences between agents’ required compensation for exposure to asset return uncertainty. We show that the relative returns on frictionlessly traded assets are only reflected in the common component of agents’ IMRSs, not in differences. Instead, when this equation does offer insights, frictions in the goods market are the source of economic distinction between agents. Received December 10, 2013; editorial decision November 5, 2018 by Editor Geert Bekaert. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

This article analyzes the importance of supply-side fluctuations for corporate hedging. To establish a causal link, we exploit a regulatory change that allows derivatives counterparties to circumvent the Bankruptcy Code’s automatic stay: the Safe Harbor Reform of 2005. Following the reform-induced expansion in the availability of derivatives, fuel hedging by airlines nearing financial distress (those that benefited most from the reform) significantly increased in comparison with financially sound airlines. We find that the hedging propensity similarly increased in a general sample of nonfinancial firms. In line with theory, we also find that operating performance increased for the affected firms.

We analyze communications between the SEC and firms prior to IPOs using LDA analysis and KL divergence. The SEC’s concerns closely map onto the regulator’s stated mandate: companies increase prospectus disclosures on precise topics of SEC concern. Revenue recognition is the dominant topic of SEC concern, and it is not independently discovered by investors. Increased SEC concern about it is associated with greater secondary sales, lower post-IPO liquidity, lower post-IPO returns, and a higher probability of withdrawal. The regulator’s role during the capital raising process results in increased transparency but contributes to delays in the going public process.

We study dividend payouts when banks face coordination-based rollover crises. Banks in the model can use dividends to both risk shift and signal their available liquidity to short-term lenders, thus, influencing the lenders’ actions. In the unique equilibrium both channels induce banks to pay higher dividends than in the absence of a rollover crisis. In our model banks exert an informational externality on other banks via the inferences and actions of lenders. Optimal dividend regulation that corrects this externality and promote financial stability includes a binding cap on dividends. We also discuss testable implications of our theory. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online