Knowledge that Transforms

I identify the effect of financial constraints on product prices using granular data on home-builder housing developments from the 2006–2009 housing crisis. Builders who experience losses in one area subsequently sell homes in unaffected areas at a discount to raise cash quickly. When builders cut prices, they sell homes faster and builders cut prices more in areas in which price cuts produce larger declines in time-to-sale. Financially constrained firms are more likely to cut prices of homes in healthy areas following losses elsewhere. Firms cut prices following losses in other projects only during the crisis, not during the boom.

We present a theory in which the interaction between limited sharing of idiosyncratic labor income risk and labor adjustment costs (that endogenously arise through search frictions) determines interest rate dynamics. In the general equilibrium, the interaction of these two ingredients relates bond risk premiums, cross-sectional skewness of income growth, and labor market tightness. Our model rationalizes an upward-sloping average yield curve and predicts a negative relation between labor market tightness and bond risk premiums. We provide evidence for our theory’s mechanism and predictions.

The paper uses bids submitted by primary dealer banks at auctions of sovereign bonds to quantify the price elasticity of demand. The price elasticity of demand correlates strongly with the volatility of returns of the same bonds traded in the secondary market but only weakly with their bid-ask spread. It predicts same-bond post-auction returns in the secondary market, even after controlling for pre-auction volatility. The evidence suggests that the price elasticity of demand is associated with the magnitude of price pressure in the secondary market around auction days and proxies for primary dealer risk-bearing capacity.

We test for gender bias in promotions at financial institutions using two central predictions of Becker’s (1957, 1993) model: firms with bias will (1) raise the promotion bar for marginally promoted female workers, and (2) incur costs from forgoing efficient employment practices. We find support for both of these predictions using a new nationwide panel of mortgage loan officers and their managers encompassing approximately 72,000 workers from over 1,000 shadow banks from 2014 to 2019. Overall, our findings provide evidence that gender bias is an important factor in gender gaps at financial institutions.

We construct a novel panel data set to provide new evidence on how the largest nonfinancial firms manage their financial assets. Our granular data show that, over the past decade, bond portfolios have grown to be at least as large as cash-like instruments, driven by the meteoric rise of corporate bond holdings. To shed light on the drivers of this growth, we conduct a pair of event studies around the 2017 tax reform and the 2020 liquidity crisis. We find that large holdings of marketable securities are primarily driven by cross-border tax incentives, while cash-like instruments are driven by liquidity motives.

We study the run on the German banking system in 1931 to understand whether depositors anticipate which banks will fail in a major financial crisis. We find that deposits decline by around 20% during the run. There is an equal outflow of retail and nonfinancial wholesale deposits from both failing and surviving banks. In contrast, we find that interbank deposits almost exclusively decline for failing banks. Our evidence suggests that banks are better informed about which fellow banks will fail. In turn, banks being informed allows the interbank market to continue providing liquidity even during times of severe financial distress.

We study financial effects of remote product delivery in the healthcare industry. Exploiting staggered law adoption for identification, we find that telehealth provision redistributes hospital operations and access to capital away from rural communities. As urban telehealth providers acquire rural patients, rural hospitals experience decreased revenue and profit, credit rating downgrades, increased cost of capital, and ultimately risk of closure. Although telehealth reduces travel costs, some communities lose access to acute care. Overall, we conclude that remote healthcare services have financial consequences as well as real effects, and their benefits are unequally distributed.

When can financial advisor conflicts of interest generate worse outcomes for clients? A regulation following from Dodd-Frank prohibits municipal advisors from simultaneously acting as bond underwriters. Using a difference-in-differences approach and 20,051 bond auctions, I test whether limited advisor privileges affect financial advice and borrower outcomes. Financing costs of bonds with potential dual advisor-underwriters fall by 11.4 basis points after the advisor is no longer allowed to underwrite. The decline follows from increases in standardization, third-party certification, and auction participation, all of which are consistent with limiting the adverse selection that arises from advisors withholding information from the market.

Little is known about the motivations and outcomes of sellers in remunerated markets for human materials. We exploit dramatic growth in the U.S. blood plasma industry to shed light on the sellers of plasma. Sellers tend to be young and liquidity-constrained with low incomes and limited access to traditional credit. Plasma centers absorb demand for nontraditional credit. After a plasma center opens nearby, demand for payday loans falls by over 13% among young borrowers. Meanwhile, foot traffic increases by over 4% at nearby stores, suggesting that constrained households use plasma markets to smooth consumption without appealing to high-cost debt.

We present a method for determining whether errors in expectations explain asset pricing puzzles without imposing assumptions about the error mechanism. Using accounting identities and survey forecasts, we find that errors in expected long-term inflation explain price variation, return predictability, and the rejection of the expectations hypothesis for aggregate stock and bond markets. Errors in short-term (long-term) nominal earnings growth expectations explain (do not explain) stock price variation and return predictability. The relevant errors are consistent with mistakes about the persistence of forecasted variables and the response to surprises. A simple framework based on fundamental extrapolation successfully replicates these findings.