Knowledge that Transforms

Using an extensive matched hedge fund-prime broker panel dataset for the period 2001–2021, we document a strong positive relationship between hedge fund leverage and prime broker’s stock price crash risk after controlling for other crash risk drivers. Our results are not only statistically, but also economically significant, showing that a one-standard-deviation increase in hedge fund leverage is associated on average with an increase of around 5% of a standard deviation in the negative skewness or the down-to-up-volatility of bank stock returns. Moreover, they remain robust when accounting for endogeneity and conducting many robustness checks. We also document that some investment strategies, such as one focusing on fixed income, appear to decrease the slope of the risk metrics of prime brokers, and ultimately leading to lower stock price crash risk.

Tariffs are commonly used to protect domestic firms from foreign competition. Using 25 major trade reforms implemented in 17 countries around the world since 1990, we document that firm value significantly increases following reductions in import tariffs. This value enhancement is concentrated in emerging markets and countries with stronger ex-ante competition laws. We identify two channels driving the increase in firm value: an increase in firm efficiency and profit margins due to lower input costs, and an increase in CEO turnover-performance and pay-performance sensitivity driven by increased competition. Overall, our findings underscore the importance of trade liberalization, while also highlighting the critical role of institutional support in fostering competition from foreign firms to stimulate private sector growth.

Using comprehensive regulatory intensity metrics from 1993 to 2019, we document that increased regulatory burden significantly reduces stock liquidity in U.S. public firms. To establish causality, we exploit exogenous variation in regulatory intensity following state ruling party changes. This identification strategy confirms that the negative relationship is causal rather than merely correlational. Our analysis reveals that information asymmetry serves as the primary mechanism, as regulatory intensity increases uncertainty about firms’ future operations, exacerbating information asymmetry between investors and companies. The liquidity deterioration is particularly pronounced for firms with higher investment irreversibility, greater financial constraints, and those without government customers. These findings contribute to understanding how regulatory burdens affect market functioning.