Knowledge that Transforms

We survey portfolio companies of a large asset owner to explore the evolving landscape of nature risks. Nearly half of all companies (48 percent) view nature risks as financially material, and 43 percent of those perceive nature-related physical risks, and 27 percent transition risks, as having financial effects already today. Three-quarters of companies experiencing nature-related investor engagement view these interactions as value-generating. Nonetheless, according to the respondents, investor attention remains limited in key respects: while 40 percent report that investors consider nature risks, fewer than 25 percent believe investors assess how these risks affect cashflows or costs of capital. Half of the respondents believe investors will prioritize climate over nature; however, many think both topics are so intertwined that they cannot be separated. Our findings underscore the growing recognition of nature risks as financially relevant, while also pointing to challenges and opportunities for their integration into financial analysis and investor engagement.

We study the impact of financial advice on retirement savings. We document that advisors help clients to prepare for retirement by inducing them to take advantage of tax incentives offered on retirement accounts. Advisors particularly promote retirement funds as compared to savings accounts. After-tax returns of advisor-induced retirement fund investments exceed returns of plausible alternative investments. We find no indication that advisor-induced contributions to retirement accounts lead to negative side effects, such as reductions in other savings or liquidity constraints. Hence, we provide evidence of a bright side of financial advice. Furthermore, investments in retirement funds increase bank profits, pointing toward a win–win situation with rent-sharing between the bank and its clients. However, advisors do not in particular target clients that are at a higher risk of under-saving for retirement, such as female clients, clients with lower wealth, and less-educated clients.

We conduct a randomized experiment involving 7,063 late-paying clients of a large Colombian bank to compare the effects of text messages that leverage different behavioral motives on loan delinquency. Our results show that receiving a message decreases the likelihood of borrowers being late by 4 percent. The effects are more pronounced and persistent when messages leverage social norms. Using machine learning tools, we find that the effects are higher among borrowers with higher credit scores and unsecured loans. A second experiment shows that this type of message is ineffective in preventing on-time borrowers from falling into loan delinquency.

The idea of separating retail and investment banking remains controversial. Exploiting the introduction of UK ring-fencing requirements, we show that this separation has a range of previously undocumented side effects for credit supply, competition, and risk-taking in credit markets not directly targeted by the reform. By redirecting the benefits of deposit funding toward retail activities, ring-fencing incentivises universal banks to expand mortgage lending. This rebalancing reduces the cost of household credit, without eroding lending standards. But it also increases mortgage market concentration, pushes smaller banks toward riskier lending, and is mirrored by a reduction in syndicated loans and credit lines.

This article explores the relationship between a firm’s legal contracting environment and its innovation incentives. Using granular data from the pharmaceutical industry, we examine a contracting mechanism through which incumbents maintain market power: “pay-for-delay” agreements to delay the market entry of competitors. Exploiting a shock where such contracts become legally tenuous, we find that affected incumbents subsequently increase their innovation activity across a variety of project-level measures. Exploring the nature of this innovation, we also find that it is more “impactful” from a scientific and commercial standpoint. The results provide novel evidence that restricting the contracting space can boost innovation at the firm level. However, at the extensive margin we find a reduction in innovation by new entrants in response to increased competition, suggesting a nuanced effect on aggregate innovation.

Privately informed about firm fundamentals, corporate insiders detect activism-motivated trades better than other traders. This article solves the model of this novel form of insider trading motivated by noninsider information and presents empirical evidence. Corporate insiders preserve their ownership (restraining from selling or buying more) before activist interventions go public to benefit from price appreciation and to defend their private benefits of control. Surveillance technology facilitates response to predisclosure activist trading, especially when positive information about firm fundamentals is absent, supporting the mechanism that insiders attribute order flows to activist interest when speculation on fundamentals can be ruled out.

Should banks be transparent during a bail-in? Banks suffering losses may bail-in creditors to optimally allocate resources between early and late withdrawers. However, if losses are private information, then bail-ins may signal asset quality. In the absence of signaling, banks can sell assets at a pooled price, effectively insuring creditors against asset risks. However, when bail-ins signal quality, banks may delay bail-ins and sell assets at higher prices than otherwise, but this incentive can trigger inefficient bank runs. To prevent such runs, banks should choose to be either fully transparent or entirely opaque, ensuring asset quality is not private information.

We show that the transmission of a monetary policy tightening varies in the cross-section of banks when central bank reserves are abundant. Specifically, the net worth of reserve-rich banks may display a boost when the interest rate paid on reserves increases strongly. Focusing on the European Central Bank’s 2022 rate hiking cycle, we show that reserve-rich banks’ credit supply is less sensitive to the monetary policy tightening compared to other banks. The effect varies in the cross-section of both banks and firms. The results are binding at the firm level, indicating the presence of real effects.

Cyber risk exposes banks to operational disruptions that can trigger runs. A bank chooses its cybersecurity by trading off protection against attacks with remaining resilient if an attack succeeds. Cybersecurity functions as a risk-management decision: it reduces the bank’s exposure to adverse outcomes but entails lower balance-sheet returns. Equilibrium cybersecurity depends on whether failure is driven by insolvency or illiquidity. When failure is insolvency-driven, bank and creditor actions reinforce one another: greater cybersecurity leads to a higher debt burden, which strengthens incentives for protection. When failure is illiquidity-driven, additional cybersecurity lowers the debt burden, eliminating the bank’s private risk–return trade-off. Socially optimal cybersecurity differs from the private choice, and corrective instruments must target either the protection or resilience margins. We extend the model to a system-wide environment in which cybersecurity is a public good, highlighting free-riding and the need for targeted regulation.