Knowledge that Transforms

We investigate whether improvements in banks' organizational capital and control systems facilitate increased loan origination to minority borrowers. We focus on bank supervisors' enforcement decisions and orders (EDOs) against banks and hypothesize that EDO‐imposed improvements in loan policies, internal governance, and employee training mitigate deficiencies in credit assessments and lending decisions that previously disadvantaged minority borrowers. We find that mortgage origination to minority borrowers increases following the resolution of EDOs, and more so for banks with stricter supervisors or more severe EDOs. Using a semisupervised machine learning method to analyze the text of EDOs, we find that such increases are higher for EDOs specifying revisions of loan policies, implementation of formal internal governance procedures, or more employee training. Overall, we find that EDO‐driven improvements in organizational capital generate unintended, positive social externalities that enhance access to credit for minority borrowers.

Complaints from institutional investors suggest that principles‐based disclosure regimes that rely on financial materiality standards produce inadequate nonfinancial environmental and social (E&S) information. Using the staggered introduction of 40 country‐level regulations that mandate disclosure, I document that reporting E&S information relates to increased investment from institutional owners and has material effects on firms’ investment and financing decisions. Firms mandated to disclose E&S information allocate more investment toward long‐term, innovative projects and raise more equity capital. Evidence indicates that disclosure attracts long‐term–oriented institutional clientele with E&S preferences, which then feeds back on firm decision making. Although the effects of nonfinancial disclosure are similar to those of improved financial disclosure, this clientele mechanism is unique. Taken together, these results suggest that jurisdictions that rely solely on financial materiality disclosure standards create nonfinancial information frictions with material effects on investors and firm decision making.

We document significant increases in bond market liquidity around earnings announcements. These increases are attributed to decreased search and bargaining costs, which arise from the over‐the‐counter (OTC) nature of bond markets and outweigh increases in information asymmetry during these periods. Our evidence traces reductions in search and bargaining costs to two sources around earnings announcements: (1) improved access to dealers and (2) increased participation from institutional investors, who can more easily transact with multiple dealers. Overall, our findings highlight a novel channel through which firm‐specific information affects asset prices.

We find that foreign‐born CEOs are more inclined than domestic‐born ones to acquire across borders, and that this inclination is explained by their preference for targets in their birth country. This preference is motivated by foreign‐born CEOs’ information advantage in their birth country and by these CEOs’ desire to give back to the birth country. CEOs’ desire to help their birth country also influences target location, increasing the likelihood of a target in countries that colonized the CEO birth country. The motives that drive acquisitions in acquirer CEOs’ birth countries measurably affect the returns of acquirers’ shareholders, target premium, and acquisition synergy. Both acquirers’ returns and synergy but not target premium are abnormally positive when the motive for an acquisition is a CEO's information advantage in the birth country. Targets premiums but not acquirers’ returns and synergy are abnormally positive when the motive for an acquisition is the desire to give back to the CEO's birth country.

This study examines whether mandatory increase in reporting frequency exacerbates agency problems. Utilizing the setting of the 2004 SEC mandate on increased reporting frequency of mutual fund holdings, we show that increased reporting frequency elevates window dressing (buying winners or selling losers shortly before the end of the reporting period). This effect is driven by low‐skill fund managers’ incentives to generate mixed signals. Funds managed by low‐skill managers experience lower returns, more outflows, and a higher collapse rate when their window dressing is elevated after the 2004 rule change. These results suggest that, although higher reporting frequency on agents’ actions can exacerbate signal manipulations, the related manipulation costs improve sorting among agents in the longer term.

We study the capital market effects of information centralization by exploiting the staggered implementation of digital storage and access platforms for regulated financial information (Officially Appointed Mechanisms, or OAMs) in the European Union. We find that the implementation of OAMs results in significant improvements in capital market liquidity, consistent with the notion that OAMs lower investors' processing costs. The findings are more pronounced when processing costs are high to begin with, that is, when firms (1) are small and receive low business press coverage and (2) have high levels of retail ownership. We then identify a mechanism through which centralization facilitates capital market effects: information spillovers. First, we find that liquidity improvements are larger when OAMs have features that easily allow investors to search for peer firm information. Second, liquidity improvements are larger for firms with a high share of industry peers operating on the same OAM and for firms with a high share of small, low‐coverage peers on that OAM. Third, around the annual report release dates of peer firms, focal‐firm liquidity improves and focal‐peer stock return synchronicity increases. Overall, our evidence suggests that, even in a modern information age, information centralization improves capital market liquidity and facilitates the acquisition and use of peer firm information.

We consider social learning in a changing world. With changing states, societies can be responsive only if agents regularly act upon fresh information, which significantly limits the value of observational learning. When the state is close to persistent, a consensus whereby most agents choose the same action typically emerges. However, the consensus action is not perfectly correlated with the state, because societies exhibit inertia following state changes. When signals are precise enough, learning is incomplete, even if agents draw large samples of past actions, as actions then become too correlated within samples, thereby reducing informativeness and welfare.

This paper develops a model of private bilateral contracting, in which an exogenous network determines the pairs of players who can communicate and contract with each other. After contracting, the players interact in an underlying game with globally verifiable productive actions and externally enforced transfers. The paper investigates whether such decentralized contracting can internalize externalities that arise due to parties being unable to contract directly with others whose productive actions affect their payoffs. The contract‐formation protocol, called the “contracting institution,” is treated as a design element. The main result is positive: There is a contracting institution that supports efficient equilibria for any underlying game and connected network. A critical property is that the institution allows for sequential contract formation or revision. The equilibrium construction features assurance contracts and cancellation penalties .

Developing country megacities suffer from severe road traffic congestion, yet the level of congestion is not a direct measure of equilibrium inefficiency. I study the peak‐hour traffic congestion equilibrium in Bangalore. To measure travel preferences, I use a model of departure time choice to design a field experiment with congestion pricing policies and implement it using precise GPS data. Commuter responses in the experiment reveal moderate schedule inflexibility and a high value of time. I then show that in Bangalore, traffic density has a moderate and linear impact on travel delay. My policy simulations with endogenous congestion indicate that optimal congestion charges would lead to a small reduction in travel times, and small commuter welfare gains. This result is driven primarily by the shape of the congestion externality. Overall, these results suggest limited commuter welfare benefits from peak‐spreading traffic policies in cities like Bangalore.

This paper investigates how tax rates and tax enforcement jointly impact fiscal capacity in low‐income countries. We study a policy experiment in the D.R. Congo that randomly assigned 38,028 property owners to the status quo tax rate or to a rate reduction. This variation in tax liabilities reveals that the status quo rate lies above the revenue‐maximizing tax rate (RMTR). Reducing rates by about one‐third would maximize government revenue by increasing tax compliance. We then exploit two sources of variation in enforcement—randomized enforcement letters and random assignment of tax collectors—to show that the RMTR increases with enforcement. Including an enforcement message on tax letters or replacing tax collectors in the bottom quartile of enforcement capacity with average collectors would raise the RMTR by about 40%. Tax rates and enforcement are thus complementary levers. Jointly optimizing tax rates and enforcement would lead to 10% higher revenue gains than optimizing them independently. These findings provide experimental evidence that low government enforcement capacity sets a binding ceiling on the revenue‐maximizing tax rate in some developing countries, thereby demonstrating the value of increasing tax rates in tandem with enforcement to expand fiscal capacity.