Knowledge that Transforms

We study the impact of bank board structure as a signaling mechanism in loan syndication. We find that the quality of the lead arranger’s board, and specifically the monitoring quality of the board, has a positive effect on the ability to syndicate a loan. The impact of board quality is separate and distinct from lead arranger reputation. Board monitoring quality plays a more important role when the borrower and lead arranger have no prior relationship, after the bankruptcy of an existing borrower, and during the financial crisis. We posit that one channel for our findings is through board oversight of the CEO, and we provide evidence that CEO quality partially mediates the relationship between board quality and loan syndication. Overall, we conclude the quality of the lead arranger’s board, as a separate and distinct effect to reputation, serves as a credible signal to participant banks, mitigating moral hazard and adverse selection concerns.

Using machine learning and many predictors, we find strong bond return predictability, with an out-of-sample R-squared of 4.48% and an annualized Sharpe ratio of 3.27. ML models identify important predictors for aggregate predictors (bond market returns, TERM and HML factors, GDP growth) and bond characteristics (downside risk, short-term reversal, return skewness, and credit spreads). Predictability varies over time, being stronger during periods of high investor risk aversion, slow economic growth, and strong cross-sectional factor explanatory power. Our results highlight the benefits of leveraging both cross-sectional and time-series predictors to forecast corporate bond returns while considering public and private bonds.

We examine the impact of board gender diversity on equity-based compensation in executive pay. We show that the presence of female directors is associated with lower equity-based compensation in executive pay—particularly when female directors serve on compensation committees or when boards are dominated by insiders. Our findings support the view that female directors serve as effective monitors, potentially substituting for other corporate governance mechanisms, such as incentive-based pay and board independence. Our results are not driven by lower pay-for-performance sensitivity induced by poor stock performance. We do not find evidence consistent with risk-aversion on the part of female directors.

This paper introduces the tone-overlay framework for adjusting traditional commodity signals based on the level of salient optimism or pessimism in commodity newswires. By implementing the novel tone-overlay allocation strategy on 26 commodities using traditional allocation signals, we demonstrate that the resulting long-short portfolios yield substantial performance gains compared to the corresponding plain-vanilla traditional portfolios. Our findings suggest that newswire tone provides short-term predictive power for commodity futures returns, beyond well-known commodity characteristics. The tone-overlay portfolios harness a temporary mispricing that reflects an overreaction of commodity futures prices to commodity-specific newswire tone. The outperformance of the tone overlay strengthens with the salience of the newswire tone, consistent with theories of limited investor attention.

We hypothesize that active mutual funds can promote corporate social responsibility (CSR) in their portfolio firms through stock trading activities. Leveraging mutual fund family mergers to identify causal effects, we find that a firm’s CSR commitment increases when its mutual funds exhibit stronger CSR preferences through trading. This effect is stronger when mutual fund investors are more active or when the firm’s stock exhibits higher liquidity. Additionally, our results suggest that the trading channel complements non-trading mechanisms through which active mutual funds influence firm CSR.

We investigate the determinants and effects of firm-initiated trading suspension during the Chinese stock market crash in July 2015. Our findings reveal that firms implemented suspensions to prevent investors’ panic selling, mitigate negative economic feedback, and safeguard specific shareholders’ interests. Once trading resumes, suspended stocks quickly align with the returns of comparable stocks, indicating that investors do not appear to penalize these firms in terms of valuation. Regarding post-resumption trading profits, small individual investors and institutions experience losses, whereas large individual investors and state agencies realize gains.

A significant fraction of corporate investments in startups are made directly without relying on corporate venture capital (CVC) units. Moreover, most firms making investments via CVC programs also make direct investments. We show that such direct investments are utilized to flexibly respond to investment opportunities over a short period of time: (1) firms respond to a competition shock by sharply increasing direct investments; (2) firms rely on direct investments when startups are easier to evaluate in the short term; and (3) direct investments are less likely to be followed up. We find no evidence that direct investments are used to entrench managers.

We analyze the effects of sovereign loan guarantees on financial stability in Portugal using a DSGE model. Sovereign loan guarantees decrease the default rate of banks and increase credit. On the other hand, guarantees increase the leverage and default rate of firms. These effects are larger the lower the sensitivity of the capital of banks to capital requirements. Behind these results are the reduction in regulatory risk-weights and the transfer of loan losses from banks to the sovereign brought by sovereign loan guarantees. A decomposition of the impact of sovereign loan guarantees suggests that insuring banks against loan losses can complement and enhance conventional macroprudential policy.

We examine the relationship between banks’ corporate social responsibility (CSR) scores, measured at the peak of the boom, and their lending behaviors during the Great Recession. High-CSR banks, expected to better support local borrowers during critical periods, instead reduced small business lending more sharply than their low-CSR counterparts. This paradox arises from CSR scores’ emphasis on visible but less material attributes, such as employee benefits, which are easier to measure during booms but deplete financial slack necessary for sustained lending under stress. Our findings highlight a misalignment between CSR metrics and material social impacts, underscoring the need for more reliable performance measures to implement stakeholderism effectively.

We decompose the idiosyncratic volatility of stock returns into “good” and “bad” volatility components, which are associated with positive and negative returns, respectively. Using firm characteristics, we estimate a cross-sectional model for the expected idiosyncratic good minus bad volatility (EIGMB). The EIGMB outperforms expected idiosyncratic skewness (EISKEW) and standard time-series models in capturing conditional idiosyncratic return asymmetry. EIGMB is negatively and significantly associated with future stock returns, even after controlling for EIKSEW and exposure to systematic-skewness-related factors. Separating the role each specific characteristic plays in driving the predictive power of EIGMB for returns, we find that return on equity and momentum are two important elements of variation in EIGMB.