Knowledge that Transforms

Abstract We construct macroeconomic attention indexes (MAI), which are new measures of attention to different macroeconomic risks, including unemployment and monetary policy. Individual MAI tend to increase around related announcements and following changes in related fundamentals. Further, bad news raises attention more than good news. For unemployment and FOMC, attention predicts announcement risk premiums and implied volatility changes with large economic magnitudes. Our findings support theories of endogenous attention and announcement risk premiums, while demonstrating future research directions, including that announcements can raise new concerns. Macroeconomic announcements are important not only for contents and timing but also for attention. 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.

Abstract We show that mutual fund ratings generate correlated demand that creates systematic price fluctuations. Mutual fund investors chase fund performance via Morningstar ratings. Until June 2002, funds pursuing the same investment style had highly correlated ratings. Therefore, rating-chasing investors directed capital into winning styles, generating style-level price pressures, which reverted over time. In June 2002, Morningstar reformed its methodology of equalizing ratings across styles. Style-level correlated demand via mutual funds immediately became muted, significantly altering the time-series and cross-sectional variation in style returns.

Abstract We use a unique quasi-experiment–spillovers from the imposition of purchase restrictions on local housing to nearby unregulated cities–to study the effects of out-of-town housing demand on house prices and consumer spending. While these restrictions effectively stymied the surge in local house prices, they induced capital flight and sharp abnormal increases in house prices in nearby unregulated cities. The effect of the house price increases on consumer spending is positive in the aggregate, but echoing Favilukis and Van Nieuwerburgh (2021), is redistributive, that is, negative for renters and positive for homeowners. 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

Abstract We assemble homeowner insurance claims from 28 independently operated country subsidiaries of a multinational insurance firm. We propose a new insurance model, in which consumers can make invalid claims and firms can deny valid claims, as is common in the data. In the model, trust and honesty shape equilibrium insurance contracts, disputes, and claim payments, especially when disputes are too small for courts. We test the model by investigating claim incidence, dispute, rejection, and payment, as well as insurance costs and pricing across countries. The evidence is consistent with the centrality of trust for insurance markets, as our model predicts. Authors have furnished data/code, which are available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract Analyzing hand-collected credit agreements for a sample of middle-market firms over 2010–2015, we find that one-third of all loans are directly extended by nonbank financial intermediaries. Two-thirds of such nonbank lending can be attributed to bank regulations that constrain banks’ ability to lend to unprofitable and highly levered borrowers. Firms with negative EBITDA and debt/EBITDA greater than six are 32% and 15% more likely to borrow from nonbanks. These firms pay significantly higher interest rates, especially following the 2013 leveraged loan guidance revisions. Nonbank borrowers also receive different nonprice terms compared to firms borrowing from banks. 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.

Abstract Theory has recently shown that corporate policies should depend on firms’ exposure to short- and long-lived cash flow shocks and the correlation between these shocks. We provide granular estimates of these parameters for Compustat firms using a new filter that uses only cash flow data and the theoretical restrictions of a canonical cash flow model. As predicted by theory, we find that the estimated parameters are strongly related to corporate liquidity and financing choices, that firms with a higher estimated correlation between shocks implement riskier policies, and that the sign of this correlation determines the cash flow sensitivity of cash. 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.

Abstract We exploit a U.K. government-sponsored product and provide evidence on shared equity mortgages. The analysis shows how the interaction of house price growth and leverage regulation promotes product adoption. Following an increase in the equity limit, households use the additional financing to buy more expensive properties rather than reduce leverage. Equity used as a complement to debt is likely less beneficial for financial stability than when used as a substitute. Equity borrowers are less likely to change lenders when refinancing their senior debt. Finally, we measure the equity provider returns, which are affected by selection and undervaluation at repayment. 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.

Abstract We study the determinants of value creation in U.S. commercial banks. We develop novel measures of individual banks’ productivities at collecting deposits and making loans that we relate to bank market values. We find that deposit productivity is responsible for two-thirds of the value of the median bank and most variation in value across banks. Variation in productivity is driven by differences across banks in technology, customer demographics, and market power. We also find evidence of synergies between deposit-taking and lending. Our findings suggest that there is significant heterogeneity in banks’ ability to capture value by manufacturing safe assets.

Abstract We investigate the structure of mutual funds’ corporate governance preferences as revealed by how they vote their shares in portfolio companies. We apply unsupervised learning tools from the machine learning literature to analyze mutual funds’ votes and find that a parsimonious two-dimensional model can explain the bulk of mutual fund voting. The dimensions capture competing visions of corporate governance and are related to the leading proxy advisors’ recommendations. Cluster analysis shows that mutual funds are organized into three “parties”—the Traditional Governance Party, Shareholder Reform Party, and Shareholder Protest Party—that follow distinctive philosophies of corporate governance and shareholders’ role. 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.

Abstract We develop a return variance decomposition model to distinguish the roles of different types of information and noise in stock price movements. We disentangle four components: noise, private firm-specific information revealed through trading, firm-specific information revealed through public sources and market-wide information. Overall, we find that 31% of the return variance is from noise, 24% from private firm-specific information, 37% from public firm-specific information and 8% from market-wide information. Since the mid-1990s, there has been a dramatic decline in noise and an increase in firm-specific information, consistent with increasing market efficiency. The Internet Appendix that accompanies this paper can be obtained here: https://bit.ly/3FcV9UR