Knowledge that Transforms

We measure the causal impact of reductions in benchmark interest rates on the renegotiation and performance of distressed loans, using 2000s subprime mortgages as a laboratory. Subprime borrowers treated with larger benchmark rate reductions benefited from increased debt-renegotiation probabilities and lower debt-service payments. Modification rates were similar among current and delinquent borrowers but higher for real estate investors, highlighting the role of financial acumen in renegotiation. Renegotiations also reduced longer-run foreclosures, but treated borrowers who lingered in delinquency offset these benefits. Findings suggest monetary easing can spur debt renegotiation but alone may not lead to longer-run curative outcomes.

We study the quantitative impact of lender control rights on corporate investment, asset prices, and the aggregate economy. We build a general equilibrium model in which the breaching of a loan covenant (technical default) entails a switch in investment control rights from borrowers to lenders. Lenders optimally choose low-risk projects, thus mitigating borrowers’ risk-taking incentives and lowering the cost of equity. This mechanism generates strong macroeconomic effects and mitigates the financial accelerator. Consistent with our model, proximity to technical default in the data is associated with 4.12% lower returns and lower exposure to systematic risk.

We analyze how ETFs compete. Drawing on a new model and empirical analysis, we show that ETF secondary market liquidity plays a key role in determining fees. More liquid ETFs for a given index charge higher fees and attract short-horizon investors who are more sensitive to liquidity than to fees. Higher turnover from these investors sustains the ETF’s high liquidity, allowing the ETF to extract a rent through its fee, and creating a first-mover advantage. Liquidity segmentation through clientele effects generates welfare losses. Our findings resolve the apparent paradox that higher-fee ETFs not only survive but also flourish in equilibrium.

We study how the human capital embedded in teams is affected by, and reallocated through, corporate bankruptcies. After a bankruptcy, U.S. inventors produce fewer and less impactful patents. Moreover, teams become less stable. Consequently, compared to inventors that rely less on teamwork, the performance of team inventors deteriorates more. These findings point to the loss of team-specific human capital as a cost of resource reallocation through bankruptcy. Acquisitions by industrial firms and joint mobility of inventors with past collaborations limit these losses, suggesting that the labor market and the market for corporate control help preserve team-specific human capital in bankruptcies.

Using proprietary data from AngelList Talent, we study how startup job seekers’ search and application behavior changed during the COVID-19 downturn. We find that workers shifted their searches and applications away from less-established startups and toward more-established ones, even within the same individual over time. At the firm level, this shift was not offset by an influx of new job seekers. Less-established startups experienced a relative decline in the quantity and quality of applications, ultimately affecting their hiring. Our findings uncover a flight-to-safety channel in the labor market that may amplify the procyclical nature of entrepreneurial activities.

We identify two issues in the work of Ouazad and Kahn (2022). Correcting either reverses the original result. The two changes are to use the correct FHFA conforming loan limits for each county and year and to compare the individual loan amount to that limit correctly. There is no evidence that lenders transfer climate risk by altering loan origination and securitization behavior. None of our results calls into question the value and importance of the O&K model as a test for adverse selection. The question addressed and the setup of the test are important and should be replicated over time.

We investigate the labor market effects of a loan guarantee program targeting French SMEs during the financial crisis. Exploiting differences in regional treatment intensity in a border discontinuity design, we uncover a central trade-off for such interventions. While the program has a positive impact on workers’ employment and earnings trajectories that translates into positive aggregate employment effects, it dampens the worker reallocation toward more productive firms that happens following recessions, and particularly so for high-skill workers. This labor allocation effect is economically significant and translates into a reduction in aggregate productivity.

This paper explores how selective default expectations affect the pricing of sovereign bonds in a historical laboratory: the German default of the 1930s. We analyze yield differentials between identical government bonds traded across various creditor countries before and after bond market segmentation. We show that, when secondary debt markets are segmented, a large selective default probability can be priced in bond yield spreads. Selective default risk accounted for one-third of the yield spread of German external bonds over the risk-free rate during the 1930s. Selective default expectations arose from differences in the creditor countries’ economic power over the debtor.

We analyze a dynamic credit market where banks choose lending standards, modeled as costly effort to screen out bad borrowers. Tighter standards worsen the borrower pool, increasing banks’ incentives to employ tight standards in the future. This dynamic complementarity in lending standards can amplify and prolong downturns, decreasing lending and increasing credit spreads. Because lending standards have negative externalities, the market can converge to a steady state with inefficiently tight lending standards. We discuss the role of optimal policy to avoid this outcome as well as the impact of balance sheet costs on lending standards.

This is an Expression of Concern regarding: Amine Ouazad, Matthew E Kahn, Mortgage Finance and Climate Change: Securitization Dynamics in the Aftermath of Natural Disasters, The Review of Financial Studies, Volume 35, Issue 8, August 2022, Pages 3617–3665, https://doi.org/10.1093/rfs/hhab124Following publication of this article, concerns were raised about the reliability of some of the findings reported.1 The journal is investigating these concerns in line with COPE guidance and is publishing this Expression of Concern to inform readers whilst the outcome of the investigation is pending.