Knowledge that Transforms

We study the role of competition in customers’ reactions to litigation against firms, using anonymized mobile phone location data. A class action lawsuit filing is followed by a 4% average reduction in customer visits to target firms’ outlets in the following months. The effect strongly depends on competition. Outlets facing more competition experience significantly larger negative effects. Closer competition matters more, both in terms of geographic and industry proximity. Announcement returns and quarterly accounting revenues around lawsuit filings also strongly depend on competition. Our results suggest that competition is an important component in customers’ ability to discipline firms for misbehavior.

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We examine the preopening process and price discovery from the offer price to the first open price in initial public offerings. The extent of price discovery during preopening is influenced by firm characteristics and preopening attributes, such as volume of shares executed in preopening, canceled orders, order imbalance, and changes in indicative price. Institutional investors cancel 4 orders for every executed order. Each phase of preopening contributes to incremental price discovery. In “hot” IPOs, almost all price discovery processes occur during preopening, whereas in “cold” IPOs, half of the price adjustment occurs after the market opens.

Using close to 800,000 transactions by 66,000 households in the United States and close to 2,000,000 transactions by 303,000 households in Finland, this paper shows that, on average, individual investors with longer holding periods choose to hold less liquid stocks in their portfolios. The relationship between holding periods and transaction costs is stronger among more financially sophisticated households. We confirm our findings by analyzing changes in investors’ holding periods around exogenous shocks to stock liquidity. Our findings challenge the notion that individual investors ignore non-salient costs when making investment decisions and suggest that they are cognizant of the cost of trading stocks.

We investigate whether compensation consultants recommend excessive pay to earn repeat business by studying consultant changes. Our results show consultants’ interests are aligned with shareholders’ to appropriately pay the CEO. Boards dismiss consultants making large pay recommendation errors, particularly positive ones. However, powerful or poorly monitored CEOs interfere with such disciplinary turnover, weakening the relation. Peer groups are more likely to change with new consultant appointments. New consultants are less likely to include highly paid executives in the compensation peer group and CEO pay falls following the change. Directors earn higher votes in annual elections when they replace compensation advisors.

We identify a parsimonious set of factors from a large pool of candidates for explaining hedge fund returns, ranging from equity market, anomaly, and trend-following factors to macroeconomic factors. The resulting 9-factor model, including five anomaly factors, outperforms existing hedge fund models both in sample and out of sample, with a significant reduction in alphas while showing substantial cross sectional performance heterogeneity. Further analysis based on fund holdings confirms the model’s ability to capture returns from arbitrage trading. Overall, the anomaly factors help quantify hedge fund strategies and risk exposures and improve fund performance evaluation.

We find that a corrupt local environment amplifies the effects of financial distress. Following regional spikes in financial misconduct, credit becomes more difficult to obtain for local borrowers—even those not implicated themselves. This is particularly harmful for cash-constrained firms, which cut investment more sharply and lay off more workers during industry downturns. We also find that local clustering of financial misconduct is a risk factor for bankruptcy.

We find that common ownership among acquirers enhances rather than hinders competition in the firm sale process. One common owner raises the likelihood that target firms are sold through auction (vs. negotiation with one buyer) by 21.5%. The effect is causal according to identifications based on mergers between financial institutions. Exploring economic channels, we observe selling firms respond to common ownership among acquirers by avoiding cross-owned acquirers, bargaining hard, and inviting more buyers when cross-owned acquirers initiate the deal but not by terminating the deal. Consistent with enhanced competition, common ownership among acquirers is positively associated with deal quality.

What are the benefits of access to the bond market for unlisted firms, and how does it affect their bank lending conditions? Using a regulatory reform that allowed unlisted firms to issue minibonds, we address these questions comparing new bank loans to issuers with concurrent loans to matched non-issuers. After the first minibond issuance, issuers obtain lower interest rates on bank loans of similar maturity, largely reflecting a shift in the seniority structure of corporate debt, and reduce the use of bank loans while increasing their total financial debt. They also increase turnover, total and fixed assets, particularly intangible assets.

We develop a real options model in which an entrepreneur facing ambiguity makes optimal investment and financing decisions for an innovation project. We introduce jumps in innovation returns and model investors’ aversion to ambiguity in both diffusion and jump risks. Debt accelerates investment by lowering the threshold and shortening expected waiting time, thereby increasing project value. This effect strengthens under greater ambiguity, offering a novel rationale for why debt—not equity—fosters innovation. Our results provide a coherent explanation for recent empirical findings on debt’s role in innovation and contribute to the broader literature on investment under uncertainty.