Knowledge that Transforms

This paper examines whether corporate social responsibility (CSR) aligns with shareholder interests or stems from agency conflicts. To explore this, we utilize the staggered adoption of state-level Corporate Opportunity Waiver (COW) laws, which potentially weaken the fiduciary duty of loyalty among directors and officers, thereby exacerbating agency conflicts. Through a difference-in-differences analysis, we find that CSR activities significantly decrease following the enactment of COW laws. This decline is more pronounced in firms with weaker corporate governance, greater external opportunities for directors and officers, less incentivized CEOs, and those operating in less competitive industries. Additionally, our results show that the positive effect of CSR on financial performance is diminished by the adoption of COW laws. These findings support the value-enhancing perspective of CSR and highlight the importance of fiduciary duty of loyalty in promoting CSR.

Prior research on the impact of market power on firms’ willingness to extend trade credit has produced inconsistent results, highlighting a critical gap in understanding firm behavior. This study addresses this issue by analyzing a comprehensive dataset of industrial firms across 26 countries, focusing on how the relationship between market power and trade credit depends on a country’s financial development level. Firms with monopolistic power often restrict credit provision to improve cash flow. However, our findings reveal a U-shaped relationship, where monopolistic firms in countries with either underdeveloped or highly developed financial sectors are more likely to extend trade credit than those in mid-level financial systems. This highlights the moderating role of financial development in shaping the interaction between market power and trade credit behavior.

Marshalling a large and novel dataset of cell towers and using the purchase of Yu’E Bao as a proxy for Chinese households’ investment in money market funds, this paper investigates how broadband infrastructure affects the welfare of households in wealth management. We find that with the improvement in broadband infrastructure, Internet service becomes more available to households and they tend to convert bank deposits with suppressed rates of interest into money market funds that provide less regulated and hence higher rates of return. Further analyses show that the effect of broadband infrastructure on the conversion of bank deposits into money market funds is more pronounced in counties with lower density of bank branches and among less educated people. Our empirical findings suggest that by alleviating the policy distortions imposed on the traditional banking sector, online financial products and service are powerful tools in the promotion of financial inclusion.

We construct a comprehensive dataset linking macroprudential policy instruments to household survey data from European Union countries. We show that two commonly used lender-based macroprudential policy instruments — levy on financial institutions and minimum capital requirement — affect new mortgage loans depending on the household’s income levels. Following higher levies on financial institutions, higher-income households on average experience a larger reduction in mortgage loan size compared to lower-income households. In contrast, following higher minimum capital requirements, lower-income households on average experience a larger reduction in loan size. We provide evidence of the different channels through which these differential effects operate.

We find that elevated economic policy uncertainty (EPU) is associated with reductions in corporate bond dealer inventories and worsening liquidity, suggesting bond dealers react to increased inventory risk by reducing their capital commitments and compensating themselves via increased transaction costs. A one standard deviation increase in EPU is associated with a 2.19% widening in bid-ask spreads, 2.36% increase in Amihud illiquidity, and 3.38% reduction in average inventories. This effect is greater for bonds issued by firms with direct exposure to government policy, and less pronounced in small firms, illiquid bonds, and calmer markets, suggesting that EPU affects bond liquidity more when macroeconomic, but not idiosyncratic, factors are the primary determinant of bond risk.

This study examines whether international tourism affects financial market investments. Using over two decades of data for more than 30 countries, we find that recreational travel between countries is associated with higher levels of foreign equity investments and reduced home bias. This evidence of tourism-induced foreign investment is consistent with the familiarity hypothesis and is unlikely to reflect superior information. We alleviate potential endogeneity concerns using several econometric techniques, including instrumental variables, quasi-natural experiments, and multiple placebo tests. Collectively, these results suggest that tourism has positive externalities in financial markets.

This study examines the pricing of multivariate crash risk (MCRASH) in the Chinese stock market. Our findings indicate a significantly positive influence of MCRASH on the cross-section of future stock returns, with the MCRASH premium being notably higher in China than in the US. A plausible explanation for China's higher MCRASH premium is that Chinese stocks may experience greater loss magnitudes in left-tail events, leading investors to demand higher expected returns as compensation for bearing a unit of MCRASH. Additionally, the return effect of MCRASH is found to be significantly stronger for stocks of non-state-owned enterprises and those with lower media coverage. Finally, we construct a four-factor model comprising market, size, value, and MCRASH factors, which demonstrates superior explanatory power compared with the CH3 and CH4 models proposed in the literature.

This study shows that hedge funds tend to design their activist campaigns to match the preferences and ideologies of institutions holding large stakes in the target company. These preferences are estimated by analyzing the institutions’ past proxy voting behavior. The findings show that activists benefit from this approach. Campaigns that show a stronger positive correlation between the preferences of larger institutions and activist communications attract more shareholder attention, receive more votes, and are more likely to succeed.

I examine whether holidays affect the forecast accuracy of equity analysts. I find that earnings forecasts issued after holidays are, on average, more accurate than those issued before. Economically, this effect is equivalent to the impact of 73 months of experience on analyst accuracy. Using heuristic behavior as a proxy for improved rest, I find that analysts’ use of heuristics declines after holidays. I examine and rule out greater information availability, increased attention, and changes in sentiment as alternative mechanisms. Overall, the results suggest that short breaks from work meaningfully improve the quality of analysts’ performance.

This study investigates the impact of banking market deregulation on firm innovation, focusing on foreign bank entry. Exploiting the staggered deregulation of China’s banking sector to foreign banks following its accession to the World Trade Organization, we find a significant positive relationship between foreign bank entry and firm innovation. We further show that foreign bank entry could promote firm innovation directly by providing more and higher-quality banking services to customers, and indirectly by inducing domestic banks to extend more credit to firms with more soft information, enhancing their capacity to support innovative firms, and generating technology spillovers through an increased presence of foreign-invested firms.