Knowledge that Transforms

Performance chasing is pervasive in active mutual funds, index mutual funds, and ETFs, with positive flow-performance sensitivity evident in both broad-based and niche funds and for the skill and nonskill components of returns. The sensitivity of ETFs is greatest, with insignificant differences between active and index mutual funds. The heightened sensitivity of ETFs is not explained by benchmark design or exchange trading, and is amplified by institutional ownership. Institutional trading of ETFs follows a momentum strategy, rather than flow management or benchmarking. Institutional herding and the outsourcing of investment management to model portfolios heightens the performance sensitivity of ETF flows.

This paper proposes a new channel through which long-term interest rates transmit to credit spreads. When life insurers carry negative duration gaps, higher rates reduce their liabilities more than assets. Rate increases therefore boost equity and risk-bearing capacity, lowering equilibrium credit spreads. Empirically, I test this channel with bond-level yields and a maturity-based discontinuity in bond ownership. Insurers’ trades confirm the mechanism: after rates rise, insurers shift portfolios towards riskier, high-yield bonds. As rates increase, bonds more heavily held by life insurers experience greater spread reductions. The results show that institutional duration mismatch shapes credit spreads and corporate financing conditions.

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.

We study the real effects of environmental activist investing. Using plant-chemical-level data, we find that targeted firms reduce their production-related emissions. Air quality improvements in the vicinity of targeted plants suggest potentially significant externalities for local economies. Reductions come from increased abatement expenditures and on-site source reduction initiatives, which negatively affect the financial performance of targeted firms. We rule out alternative explanations, including declines in production and plant closures, and provide evidence that firms respond to the specific demands of activists. Our findings suggest that environmental activism is an effective tool for long-term shareholders to address climate change risks.

Do impact investors seek impact, or merely “impact wash”? We provide systematic evidence on the nonfinancial determinants of impact investing. Impact investors focus on firms aligned with the priorities of the federal government and disproportionately invest in economically disadvantaged regions. While we find high levels of coinvestment between impact and traditional investors, we also show that impact investors influence the strategies of their traditional coinvestors, are more likely to fund firms in nascent industries, and invest countercyclically. Finally, we characterize investment heterogeneity based on a novel classification of impact investment theses, with a focus on climate, environment, and jobs and equity.

Increasing personal bankruptcy protection raises consumers’ desire to borrow and lenders’ cost of extending credit; the impact on equilibrium borrowing is ambiguous. Using bankruptcy protection changes between 1999 and 2005 across U.S. states, we find that borrowers respond to greater protection by increasing their unsecured debt. Border county estimates suggest that local economic conditions do not drive these results. Borrowers pay more for protection through higher interest rates, yet delinquency is unaffected. Our results indicate that rising borrower demand outstripped decreasing supply. Increased protections did not reduce the aggregate level of household debt but affected the composition of borrowing.

We introduce the nonlinear arbitrage correction (NAC), the residual that renders a linear benchmark model arbitrage-free while preserving the law of one price. The price of NAC captures the marginal Sharpe ratio increase consistent with no-arbitrage and upper-bounds the constrained Hansen–Jagannathan distance. Using four decades of international equity, currency, and factor returns, NAC is strongly countercyclical, peaking during crises when linear models turn negative. The implied Sharpe ratio increase reaches 0.3, underscoring its economic relevance. While linear models perform well on average, they fail in distressed states, underpricing nonlinear payoffs. Incorporating NAC restores positivity and stabilizes pricing across regimes.

We argue that heightened regulation on large banks contributed to the rise in fragility of smaller banks revealed by the 2023 regional bank crisis. In 2018, regulators restricted Wells Fargo, the third largest U.S. bank, from growing its total assets. We estimate this asset cap led Wells Fargo to give up deposits amounting to 2.2% of aggregate bank deposits. These deposits, primarily uninsured, were reallocated to banks geographically proximate to Wells Fargo, including smaller, less regulated banks. In turn, these banks experienced higher deposit outflows once monetary tightening commenced and saw their stock prices plummet during the 2023 stress.

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.