Knowledge that Transforms

Abstract The strength of the U.S. dollar has attributes of a barometer of dollar credit conditions, with a stronger dollar associated with tighter dollar credit conditions. We find that following dollar appreciation, exporters that are more reliant on dollar-funded bank credit suffer a greater decline in credit and slowdown in exports, including those exporting to the United States. Our findings shed light on the role of the U.S. dollar in the interaction between financial globalization and international trade and show a novel channel of exchange rate transmission that goes in the opposite direction to the competitiveness channel. 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 provide new evidence that disruptions in firms’ access to credit during the Global Financial Crisis significantly affected product innovation in the consumer goods sector. We combine highly granular retail scan data with lending data and find that credit-constrained firms introduced fewer new products, those products were less novel, and new products sold less well. Overall, these findings suggest that disruptions to credit markets impair firms’ ability to compete for profits through new product offerings. 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 I analyze the inter vivo transfers and bequest decisions of 700,000 individuals during a period when the decision maker receives negative news regarding their life expectancy. The event that initiates the news is a health outcome. Expected mortality increases both the likelihood of transferring wealth to the next generation and the amount transferred. The size of the inter vivo transfer and bequest are positively related to the wealth of the parent and the severity of the diagnosis, regardless of diagnosis-specific demand for informal care. Using a structural life cycle model, I estimate the bequest parameters that are consistent with the causal effect estimates. 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 analyst behavior changes in response to a randomly assigned shock that exogenously varies the timeliness and cost of accessing mandatory disclosures in the cross-section of investors: analysts reduce coverage and issue less optimistic, more accurate, less bold, and less informative forecasts. Our evidence indicates that analysts reduce a strategic component of their behavior: the changes are stronger among analysts with more strategic incentives like affiliated or retail-focused analysts. We conclude that mandatory disclosure can substitute for analyst information production, which is constrained by investors’ ability to verify forecasts using corporate filings. 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 find that firms reduce toxic emissions at their local plants following EPA enforcement actions against nearby plants operated by peer firms that compete in the same product market. These reductions are more pronounced for plants located near socially responsible mutual funds (SRMFs) that hold these plants’ parent firms’ shares. Close proximity to SRMFs is associated with real investment in abatement measures to mitigate emissions. While plants increase emissions again in the long run, such reversals do not occur in plants located near SRMFs. Taken together, our results suggest that local SRMFs complement EPA enforcement in influencing plants’ emissions. 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.

In this paper, we consider conditional measures of lead-lag relations between aggregate growth and industry-level cash flow growth in the United States. Our results show that firms in leading industries pay an average annualized return 3.6 higher than that of firms in lagging industries. Using both time-series and cross-sectional tests, we estimate an annual pure timing premium ranging from 1.2 to 1.7. This finding can be rationalized in a model in which (a) agents price growth news shocks, and (b) leading industries provide valuable resolution of uncertainty about the growth prospects of lagging industries.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 Drawing upon more than 12 million observations over the period from 1996 to 2020, we find that allowing for nonlinearities significantly increases the out-of-sample performance of option and stock characteristics in predicting future option returns. The nonlinear machine learning models generate statistically and economically sizable profits in the long-short portfolios of equity options even after accounting for transaction costs. Although option-based characteristics are the most important standalone predictors, stock-based measures offer substantial incremental predictive power when considered alongside option-based characteristics. Finally, we provide compelling evidence that option return predictability is driven by informational frictions and option mispricing. 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 observability of investors’ information-acquisition activities in financial markets. Improving observability leads to two strategic effects on information acquisition: (1) the pricing effect, which arises from interactions between investors and the market maker and can encourage or discourage information acquisition, and (2) the competition effect, which concerns interactions among investors and always encourages information acquisition. We apply our theory to study voluntary and mandatory disclosures of corporate site visits. When the competition effect dominates, investors voluntarily disclose their visits. When the pricing effect dominates, mandatory disclosure is effective. Our analysis sheds novel light on Regulation Fair Disclosure. 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 capital requirement regulation in a dynamic quantitative model in which nonfinancial firms, as well as households, hold deposits. A novel general equilibrium channel that operates through firms deposits mitigates the cost of increasing capital requirements. In the calibrated model, (a) the optimal capital requirement is 7.3 percentage points higher than in a comparable model in which all the deposits are held by households, and (b) setting the capital requirement higher than the true optimum is not as costly as one would gauge from the comparable model. We also provide some independent evidence that supports our novel channel.

Abstract Many of the Federal Reserve’s (the Fed’s) monetary policy operations involve trading with primary dealers. We find that, for agency MBS, dealers charge 2.5 cents (per $100 face value) higher selling to the Fed than to non-Fed customers. Controlling for the same dealer, same security, and same trading time, this discriminatory pricing likely arises from dealers’ market power rather than inventory costs. Further, matching trade size reduces the price differential by more than half, implying that dealers’ market power greatly relates to the Fed’s purchases in large amounts, whereas the Fed’s limited breadth of counterparty choice also plays some role.