Abstract Portfolio performance measures using holdings data are panel regressions. The returns of a fund’s stocks are regressed on its lagged portfolio weights. Stock fixed effects isolate average performance from time-series predictive ability. Control variables condition for fund performance on the characteristics of the stocks held. The long-term performance of average holdings drives some of the classical measures, while predictive ability drives others. A “buy-and-hold drift,” where portfolio weights increase over time in the higher alpha stocks, affects performance measures. Investor flows respond to average performance net of the buy-and-hold drift. (JEL G11, G14, G23, G29).

This paper uses issuance-level data to study how equity capital inflows that enter emerging market economies affect equity issuance and corporate investment. It shows that foreign inflows are strongly correlated with country-level issuance. The relation especially reflects the behavior of large firms. To identify supply-side shocks, capital inflows into each country are instrumented with exogenous changes in other countries’ attractiveness to foreign investors. Shifts in the supply of foreign capital are important drivers of increased equity inflows. Instrumented contemporaneous and lagged capital inflows lead large firms to raise new equity, which they use to fund investment.

The coronavirus (COVID-19) pandemic halted economic activity worldwide, hurting firms and pushing many of them toward bankruptcy. This paper discusses four central issues that have emerged in the academic and policy debates related to firm financing during the downturn. First, the economic crisis triggered by the pandemic is radically different from past crises, with important consequences for optimal policy responses. Second, it is important to preserve firms’ relationships with key stakeholders (e.g., workers, suppliers, customers, and creditors) to avoid inefficient bankruptcies and long-term detrimental economic effects. Third, firms can benefit from “hibernation,” incurring the minimum bare expenses necessary to withstand the pandemic while using credit to remain alive until the crisis subdues. Fourth, the existing legal and regulatory infrastructure is ill-equipped to deal with an exogenous systemic shock like a pandemic. Financial sector policies can help channel credit to firms, but they are hard to implement and entail different trade-offs.

In November 2011, the Financial Stability Board, in collaboration with the International Monetary Fund, published a list of 29 "systemically important financial institutions" (SIFIs, now referred to as "globally systemically important banks" or G-SIBs), institutions whose failure, by virtue of "their size, complexity, and systemic interconnectedness", could have dramatic negative consequences for the global financial system. While "size" and "interconnectedness" have been the subject of much quantitative analysis, less attention has been paid to measuring "complexity." Yet without a consistent way to measure complexity, there is little guarantee that the designated SIFIs capture the complexity that the FSB is concerned about, and little hope of mitigating the consequences that the FSB warns of. In this paper we propose the structure of an individual firm's majority-control hierarchy as a proxy for institutional complexity. We demonstrate as a proof-of-concept how this method might be used by bank supervisors, particularly the Federal Reserve under its authority as consolidated supervisor, using a data set containing information on the majority-control hierarchies of many of the designated SIFIs. Our mathematical intrafirm network representation (and various associated metrics we propose) provides a uniform way to compare firms with often very disparate organizational structures – one that is distinct from a simple size comparison.

In financial stability, it is essential to know the determinants of interest rates in interbank markets because they are important vehicles for liquidity allocation among banks and are relevant for monetary policy transmission. Recent research indicates that banks with excess liquidity exercise their market power by rationing liquidity during periods of financial stress. This confirms the value of knowing the banks connections and identifying liquidity spreaders in such markets to manage contagion risk, liquidity hoarding and to preserve financial stability. In addition to well studied bank features such as size, liquidity and credit risk, we study which network metrics relate to interest rates during different periods. Using transaction level data on unsecured and secured lending, we apply an approach that employs network theory, econometric models and machine learning to analyze the structural properties of the secured and unsecured interbank markets in Mexico. Our findings support the “too-interconnected-to-fail” hypothesis. In the secured interbank market, PageRank shows a relationship with interest rates, while metrics associated with the notion of influence and systemic risk (Katz and DebtRank) are relevant in the unsecured interbank market. In general, a bank with high centrality lends at higher rates and gets funding at lower rates.

Abstract Bloom et al. (2016) find that Chinese import competition induced a rise in patenting, IT adoption, and total factor productivity (TFP) by up to 30% of the total increase in Europe in the late 1990s and early 2000s. We uncover several coding errors in an important robustness check of their patent results. When corrected, we find no statistically significant relationship between Chinese competition and patents. Other specifications in the original paper use a problematic $ \log(1+\rm patents) $ transformation. This normalization induces bias given low average patent counts for firms in China-competing sectors and rapidly declining patents across the sample.

ABSTRACT How can features of the markets for audit and nonaudit services (NAS) affect an audit firm's incentives to invest in audit quality, average audit quality, and social welfare? We address these questions in a model focusing on competition in both audit and NAS markets. We show that, when audit and NAS demand are positively correlated, prohibiting auditors from providing NAS to audit clients leads to higher investments in audit quality, but can decrease average audit quality if marginal clients switch to lower quality auditors. The effect on social welfare can be positive or negative, depending on the distribution of clients' service demands. General bans on auditor provision of NAS can, via similar channels, increase or decrease audit quality and social welfare. Overall, our findings suggest a more nuanced view of how regulating an auditor's provision of NAS might affect audit quality and social welfare, and are driven by the effects of multimarket competition on the auditor's incentives to invest in audit quality, rather than previously identified auditor independence or knowledge spillover channels.

ABSTRACT The fact that incumbent firms can immediately deduct research and development (R&D) investments from taxable income is generally believed to give them a strategic advantage over new firms that cannot deduct the investment cost, but instead generate a net operating tax loss carryover. Using an analytical model, we show that this conventional wisdom need not hold in a competitive environment. We examine operating and investment decisions in a duopolistic industry in which an initial investment in R&D yields an immediate tax benefit for one firm, but creates a net operating loss carryover for the other firm. If both firms invest in R&D, the firm with the net operating loss carryover makes more aggressive capital investment decisions following successful R&D. This may deter the incumbent firm from investing in R&D despite the lower aftertax costs of this investment. Changing the tax loss carryover rules would thus not only affects start‐up or loss firms, but would also affect the investment decisions of profitable firms in the same industry.

Abstract This paper reassesses two conflicting hypotheses on the valuation impacts of private placements of equity (PPEs), the monitoring/certification hypothesis and the managerial entrenchment hypothesis, by focusing on the shareholder approval, active buyer, and premium pricing features of PPEs. We find that PPEs with these features have significant positive announcement returns and insignificant mean long-run returns, while the corresponding announcement and long-run returns for PPEs without such features are significantly negative. Firms with value-enhancing PPE features are better governed and use proceeds more efficiently. Thus, the heterogeneous nature of PPEs helps reconcile the puzzling return patterns and conflicting hypotheses regarding PPEs.