Knowledge that Transforms

We document widespread use of personal financial advice among retail investors. Individuals seek competent and trusted sources for financial advice among their family and friends. Investors who provide advice to family and friends are positively selected and emphasize the reputational costs of giving risky financial advice. While previous studies have shown that advice shared on social media promotes active trading, we show that personal financial advice encourages investing in funds over single stocks. Our evidence complements the existing literature on financial advice in online social networks by highlighting differences in incentives and outcomes of advice to close personal connections.

We model the feedback loop between the sales of trading advantages (e.g., data or co-location services) and traders’ endogenous participation in financial markets. Whereas a trader’s benefit from purchasing trading advantages increases with aggregate market participation, the benefit from participating decreases with other traders’ purchases of trading advantages that impose negative externalities on counterparties. In equilibrium, sellers of trading advantages (e.g., data providers or securities exchanges) may maximize their profits by prompting inefficiently low market participation and liquidity. We study the consequences of altering the market structure and show that the resulting policy prescriptions contrast sharply with standard models.

Many initial public offerings (IPOs) are priced at exactly the high-end of the pricing range. Investing in IPOs priced at the high-end leads to first-day returns that are substantially higher than investing in IPOs that are priced just below or above the high-end. We argue that these results are in line with issuing firms settling for positively perceived salient pricing points in negotiations with underwriters.

We combine high-frequency stock returns with risk-neutralization to extract the daily common component of tail risks perceived by investors in the cross-section of firms. Our tail risk measure significantly predicts the equity premium and variance risk premium at short horizons. Furthermore, a long–short portfolio built by sorting stocks on their recent exposure to tail risk generates abnormal returns with respect to standard factor models. Incorporating investors’ preferences via risk-neutralization is fundamental to our findings: the predictive power of the physical tail risk is weaker and generally subsumed by its risk-neutral counterpart.

We examine the impact of the EU Banking Union on the information production of stress tests by exploiting the institutional shift in supervisory responsibility for significant banks to the European Central Bank (ECB) under the Single Supervisory Mechanism (SSM). We hypothesize that a centralized authority with both supervisory and financial stability mandates may reduce the informativeness of stress tests to mitigate negative spillovers, particularly potential threats to financial stability arising from disclosure. Our findings support this hypothesis, showing that the information production from stress tests declined following the introduction of the SSM. This reduction is primarily driven by weakly performing banks. We find no support for alternative explanations such as supervisory leniency, market learning, or the absence of an acute crisis.

This paper examines the Reaching-for-Coupon (RFC) phenomenon in U.S. corporate bond mutual funds. We define RFC as a portfolio tilt toward higher-coupon bonds relative to peers with similar yields. Using detailed bond-level holdings data from 2002–2018, we construct a novel fund-level RFC measure and show that high-RFC funds attract larger inflows, particularly in low-interest-rate environments. Crucially, investor flows into RFC funds are less sensitive to poor performance, leading to a less concave flow–performance relationship and mitigating redemption-driven fragility. These altered flow dynamics strengthen managerial incentives to take risk. Moreover, compared to Reaching-for-Yield (RFY) funds, RFC funds provide more stable income streams and are less exposed to credit downgrades. Our results demonstrate that RFC captures a distinct channel through which income-driven investor demand shapes risk-taking and fragility in bond markets.

We show that the Dodd-Frank Act stress tests worsened bank loan terms and reduced vacancy postings by 16% among private firms with prior relationships with stress-tested banks. The decline is concentrated in postings for less-educated workers, indicating a contraction in hiring along this margin. These effects are temporary. Firms respond to tighter credit by shifting toward smaller financial institutions. This adjustment increases loan sizes from both new and existing lenders, which mitigates the impact of stress tests on labor demand over time.

We analyze the potential impact of the recent US reform that permits employers to match retirement plan contributions when employees repay their student loans. Our calibrated lifecycle model measures the impact of this policy on heterogeneous household financial behavior and welfare. We show that, post-reform, workers optimally reduce their own retirement plan contributions in exchange for the employer matches and repay student loans more slowly and smoothly. The reform also boosts financial wealth and annual pre-retirement consumption. Workers with high student debt relative to expected lifetime income gain the most from the reform, reflecting their greater repayment burden.

This paper investigates how historically intensive irrigation systems influenced enduring institutional and cultural traits that constrain firms’ access to finance. Combining geo-climatic measures of irrigation potential with firm-level data from 174 ethnic regions across 146 countries, we find that historically irrigated societies are characterised by weaker property rights, lower trust in financial institutions, and greater reliance on internal financing. Firms in these regions report more severe financial obstacles and higher rejection rates from banks. Implementing a spatial regression discontinuity design around the Lower Rhine and using irrigation potential as an instrument, we provide evidence consistent with a long-term influence of historical irrigation on modern credit frictions. The effects are most evident among privately owned domestic firms, unaffiliated firms, and those with higher female ownership. These findings indicate that ancient irrigation infrastructure is associated with persistent imprints on contemporary financial markets.