Knowledge that Transforms

This paper explores the role of monetary systems when fiscal policy is implemented through the financial sector during a liquidity shock. We use loan-level transactions from the Paycheck Protection Program (PPP) to understand how a bank’s decision to borrow funds from the discount window (DW) affected its lending behavior during the COVID-19 crisis. Using an instrumental variable approach, we find a causal relationship between DW access/borrowing and the number of PPP loans extended by large banks, indicating that access to DW increased the effectiveness of the PPP. Although both large and small banks accessed the DW in the absence of a long-term funding source, accessing the DW almost doubled the PPP lending for large banks, but did not have a statistically significant effect for smaller banks. However, during the period without long-term funding, the DW played an important role in relaxing liquidity constraints for large banks and increasing the overall efficiency of the PPP. Beyond PPP loans, we find that DW access led banks to increase their non-PPP lending by 70% relative to their reserves, suggesting broader benefits to credit provision. The DW effect on PPP lending disappeared after the introduction of PPP Lending Facility as the banks substituted towards the long-term funding, however its impact on non-PPP lending remained significant in both phases.

• We find a significant spread between the average returns of the high- and low-risk hedge funds. • Unlike HFs, the risk–return relationship for funds of hedge funds (FoHFs) is insignificant. • FoHFs do not compensate for risk-taking during market downturns. • Optimally weighted portfolios of HFs rank among the top 10% of FoHF performers. This study compares the predictive power of downside risk for hedge funds and fund of hedge funds returns. We find a positive relationship between downside risk and return for hedge funds but not for funds of hedge funds. This result is robust to the downside risk measure employed and additional control variables. Furthermore, we find that funds of hedge funds perform significantly worse than hedge funds during adverse equity market regimes, exhibiting an inverse (negative) risk–return relationship. Finally, we form realistic portfolios to determine whether an investor can construct a portfolio that outperforms the average fund of hedge funds. These portfolios display superior risk-adjusted performance and rank among the top performers of funds of hedge funds in our sample.

China's financial deregulation has led to the rise of individual-controlled fund management companies, where the largest shareholder is a person rather than an institution. This study examines these mutual funds, known as “individual-controlled funds” (ICFs), particularly from the perspective of potential conflict of interest. ICFs are more likely to prioritize performance given there is limited interference in their activities by affiliated institutions. They consistently outperform peers by 0.7 % per month, after accounting for fund characteristics. This outperformance is more pronounced when the largest individual owner has greater influence in the fund company. We also document the lower propensity of ICFs to engage in misconduct. Our findings demonstrate that minimizing conflicts of interest benefits performance in the mutual fund industry.

This article provides first evidence on the capital market effects of the EU Taxonomy Regulation (TR). The TR introduced a new classification scheme to identify companies with environmentally sustainable economic activities. The results offer support for a significant estimated TR alignment premium, compatible with the interpretation that investors already apply the TR and allocate capital to TR-aligned companies. This effect strengthens with an increase in investor attention. We also find significant cross-sectional variation in abnormal stock returns surrounding the publication date of the TR conditional on the degree of estimated TR alignment. Traditional ESG ratings cannot explain the TR premium.

We study whether foreign banks’ exposure to the pandemic in their home countries affected their lending in Türkiye. Although foreign banks issued more loans than domestic banks, the ones with higher exposure to the pandemic decreased their lending significantly: 1 percentage point higher number of deaths per thousand people in their home countries led to an almost 0.5 percent reduction in lending. This reduction was alleviated by the fiscal support provided in their home countries. Our results support an international spillover of the pandemic shock and the implemented fiscal policies via banks.

In the 1990s and the 2000s, many urban credit cooperatives in China were reformed to city commercial banks with the introduction of government ownership. We exploit this bank ownership reform as a quasi-natural experiment to evaluate its impact on corporate maturity mismatch. We find that local firms reduced reliance on short-term debt for investments by obtaining greater long-term credit. The reduction of corporate maturity mismatch is more pronounced if the city has fewer financial resources, or if the firm has greater financial constraints, R&D intensity, or market competition. Local firms’ capital allocation efficiency also increased. Our findings highlight the positive effect of government ownership in enhancing liquidity and promoting growth.

This study proposes “reflexive crowdedness” as a mechanism through which order flow can become toxic at ultra-high frequencies (UHFs). Crowdedness, a coordination problem arising from the inability of traders to accurately gauge competition, leads to significant unbalanced mispricing in the form of liquidity costs. This mispricing is amplified by (reflexive) feedforward loops between liquidity and price components and can accumulate rapidly when high-speed traders engage. We develop an empirical framework to examine this mechanism in UHF trading. Results on trades of Dow 30 stocks show that reflexive crowdedness triggers speculative algorithmic trading and drives order flow toxicity and market instability at high frequencies. We formulate a UHF measure of reflexive crowdedness and find it predicts various UHF phenomena, including flash crashes and spikes, more reliably than price volatility and the Volume Synchronised Probability of Informed Trading (VPIN). This makes this measure highly relevant to investors, traders, market operators, and regulators.

This paper argues that bonus caps can be welfare improving in banking labour markets with high mobility. On the labour market, the largest banks hire the most talented traders, but they need to do so with contracts with high bonuses in order to both screen talent and to prevent poaching by smaller banks. This can lead to excessive risk taking. In some cases, it is socially optimal to prevent screening, leading to a less efficient matching of talent to banks, but also to less risk taking. Bonus caps can achieve this in a way that is both more effective and less costly than setting tighter capital constraints.

We examine the relation between home CEOs and corporate social responsibility (CSR). Our analysis shows home CEOs are associated with higher CSR engagement and increased firm value. These firms exhibit higher asset turnover, lower cost of equity , improved productivity, sales, and profit margins. Home CEOs focus more on community, environmental, and employee-related CSR, and are linked to reduced carbon emissions . This relationship is stronger in firms with higher local business concentration and investor monitoring. Firms led by home CEOs earn higher returns during recent crises. Our results suggest the value increase is not primarily due to agency effects and remain robust to endogeneity concerns. The study indicates a CEO’s community connection may influence CSR effectiveness, suggesting that mere CSR engagement may not suffice to boost trust and value. These results highlight the potential importance of local ties in corporate leadership and CSR strategy.

We empirically investigate how short selling affects firms’ product market performance via a managerial monitoring channel. Using both historical data and exogenous shocks to short selling, we find robust evidence that short interest negatively impacts market shares, especially in large firms. Our Reg SHO results are stronger in concentrated industries and industries where firms compete in strategic substitutes. Further tests show that these effects are driven by low ex-ante stock price informativeness. The evidence suggests that the interaction between market power and price opacity generates incentives for overproduction, which short selling attenuates. Our results support policies that facilitate price discovery in the presence of market power.