Knowledge that Transforms

An unprecedented number of firms announced CEO salary reductions at the onset of the coronavirus pandemic. We document that the total compensation for these CEOs did not actually decrease but was instead restructured, leading to a marked increase in opaque components of compensation. These adjustments align with the managerial power view of executive pay setting, whereby heightened stakeholder outrage prompts greater camouflaging of compensation to avoid scrutiny. We further show that this pattern of compensation adjustments predominantly occurred in firms with powerful CEOs, weak institutional investor monitoring, and poorer governance quality.

Competitive threats motivate firms to use convertible debt because the possibility of future conversion enhances financial flexibility. Consistent with this intuition, we find that the intensity of competitive threats is positively associated with convertible debt financing at both the extensive and intensive margins. By using large tariff reductions as exogenous shocks to competition we show that this relation is likely causal. Convertible debt usage in response to competitive threats strongly depends on a firm’s relative financial and competitive conditions. In addition, firms increase the probability of future conversion by tailoring convertible debt features. (JEL D34, G30, G32, G39)

By examining required rates of return, we study how shareholders perceive stronger stakeholder orientation arising under the adoption of constituency statutes. Constituency statutes decrease (increase) the cost of equity for firms operating in high- (low-) competition industries. For firms in high-competition industries, constituency statutes increase future cash flows and performance resilience to negative industry downturns, suggesting that constituency statutes facilitate CSR activities for product differentiation in competitive industries. In contrast, for firms in low-competition industries, constituency statutes reduce future cash flows and increase tail risks, suggesting that constituency statutes shield managerial agency problems from discipline.

We document the structure of firm-bank relationships for the 11 largest countries in the euro area and present new stylized facts using data from AnaCredit. We look at the number of banking relationships, reliance on the main bank, credit instruments, loan maturity, and interest rates. Firms in southern Europe borrow from more banks and obtain a lower share of credit from the main bank than those in northern Europe. They also tend to borrow more on short-term, more expensive instruments and to obtain loans with shorter maturity. The findings are consistent with the hypothesis that firms in southern Europe rely less on relationship banking and obtain credit less conducive to firm growth, in line with their smaller average size. Relationship lending does not translate into lower rates, possibly because banks appropriate part of the surplus generated by relationship lending through higher rates. Finally, assortative matching, according to which small banks specialize in supplying credit to small firms, is stronger in northern European countries.

We investigate the impact of the fiduciary duty of loyalty on corporate culture. Leveraging the staggered state adoption of corporate opportunity waiver (COW) laws as an exogenous fiduciary loyalty decline, we find that COW laws deteriorate corporate culture. This effect operates through increased board overlapping and director busyness and is more pronounced in firms with legal-expert directors, weaker governance, and greater outside opportunities as well as in smaller or younger firms. The results are robust across alternative measures, time frames, legislative events, estimation strategies, etc. Overall, the fiduciary duty of loyalty plays a crucial role in enhancing corporate culture and firm performance. (JEL G34, G38, M14)

We argue that the effective price of investing in hedge funds far exceeds the headline fee rate of “2-and-20.” In a large 22-year sample of hedge funds, we find that 60% of the gains on which incentive fees are paid are eventually offset by losses. As a result, the effective incentive fee rate is 50% vis-à-vis the nominal 20% rate. The tendency of investors and managers to disinvest capital after negative returns contributes to this phenomenon by causing the crystallization of underwater fees and net losses as well as by eroding the protection intended by the high-water mark provision. (JEL D24, G11, G23, J33)Received: April 17, 2025Editor: J. Anthony CooksonAuthors 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.

Inaccurate borrower-provided information in marketplace loans is informative about credit risk. An inaccuracy index constructed from the consistency of loan amount with outstanding credit balance, roundness of reported income, and roundness of chosen loan amount predicts the likelihood of default, and the additional default risk is not compensated by higher interest. Inaccurate information is more prevalent in areas with lower social capital and weaker social norms. It is also lower among borrowers whose professions are considered less honest, and among borrowers with higher income uncertainty. These results suggest that inaccuracy is driven by both deliberate misreporting and genuine uncertainty. (JEL D12, D91, G23, G41)

We study the broad question about the sources of FinTech lending growth by examining a specific representative product for which the technologies of both FinTech and the incumbent competitors can be identified and compared—small business lending. We test whether the presence of incumbents employing different technologies affects FinTech penetration, and find more FinTech lending where large/out-of-market banks are more prevalent. Using stress test exposures and Community Reinvestment Act examinations as instruments, we find that FinTech credit more often substitutes for loans by large/out-of-market banks than small/in-market banks. Results are consistent with FinTech advantages in processing hard information, rather than hardening soft information. (JEL G21, G23, O33)

We study the political economy of loan guarantees within a credit-rationing framework. A government uses guarantees to decrease the borrowing cost, thus making more households incentive compatible. This shifts capital to productive projects (allocative effect). Backed by taxpayers, loan guarantees also shift consumption from nonborrowers to borrowers (redistributive effect). While a welfare-maximizing planner is only concerned about the allocative effect, vote-share-maximizing politicians are driven by the interaction of both effects. As a result, politicians may underprovide or overprovide guarantees compared to the welfare-maximizing solution, depending on the electoral setup, household risk aversion, income heterogeneity, and guarantees’ externalities. (JEL D72, G28)

We present a search model that incorporates two key features of security issuances in centralized markets: the search for investors and information gathering. In the model, a seller contacts investors sequentially and uses reported interest to update the security’s value, while each investor reports interest strategically. We characterize the seller’s value-maximizing strategy in which search structure, duration, security pricing, and allocations are jointly determined. We derive novel implications from the model and find empirical support using a sample of accelerated seasoned equity offers, which have become prevalent in recent years and involve both search and information gathering.