Knowledge that Transforms

Abstract We investigate whether judges’ political ideology affects corporate tax behaviors. We find that firms engaging in less aggressive tax planning when Circuit Court judges are more liberal. Cross-sectionally, the deterrent effect of liberal judge ideology is more pronounced for firms that engage in judiciary-sensitive tax strategies, face higher enforcement risk from the Internal Revenue Service (IRS), or have larger reputational costs from tax disputes. Our findings further suggest that liberal judge ideology reduces firms’ R&D investments and market value by constraining tax planning. Overall, our evidence highlights the importance of judge ideology for firm behavior in the context of corporate tax planning.

Abstract We examine hidden orders usage by algorithmic traders (ATs) and nonATs. ATs extensively use hidden orders but of smaller size than nonATs, who are the primary contributors to hidden volume. ATs’ relative share of hidden volume decreases with volatility, adverse selection costs, and the relative tick-size. Proprietary ATs (HFTs), who differ from agency ATs (AATs) in their information sets and potential gains from trade, hide orders to reduce competition for liquidity provision, whereas AATs use hidden orders to conceal information in their more informed orders and manage picking-off risk. Finally, superior technology provides limited benefit for hidden order execution.

Abstract Practical real-world activities consume energy and emit thermal infrared radiation (TIR). Leveraging this physical fact, we develop a direct, real-time measure of firms’ operating activity using satellite data. Tracking 28,236 factories of Chinese listed firms, we find TIR declines significantly following operational shocks and strongly forecasts subsequent sales growth, costs, investment, employment, and profits. TIR also predicts future stock returns, especially among opaque firms and those with limited investor access, yet sophisticated investors largely ignore this information. Our findings highlight TIR as a distinctive, under-exploited indicator of corporate fundamentals.

Abstract This article investigates sample selection bias in early-stage investment. We use comprehensive administrative data on the universe of new firm starts in Norway, allowing us to compare venture-backed firms with ex ante similar firms that do not receive venture funding. The valuation premium for venture backing is sizeable at firm birth and doubles over the first 5 years, implying a substantial upward bias in venture capital (VC) returns relative to comparable firms. In contrast, the premium for firms receiving multiple rounds of outside equity emerges only after the first year and remains significantly smaller than the VC premium throughout the firm life cycle.

Abstract Predictive regressions of market returns on option-implied moments measured before pre-scheduled FOMC meetings show that tail risks play an important role in understanding the market risk premium around FOMC announcement days. Skewness and kurtosis, which capture investors’ expectations of the tails of the return distribution, robustly predict post-FOMC returns both in-sample and out-of-sample. The predictability lasts up to 1 week and is stronger for expansionary monetary policy shocks. The signs of the corresponding risk premiums are consistent with economic intuition, illustrating the role of periods with high risk premiums to confirm theoretical predictions.

Abstract Using individual records of about 950,000 financial advisors, we find that the probability and intensity of financial advisor misconduct significantly increase after local newspaper closures. The impact is more pronounced in counties with a higher proportion of seniors, minorities, and individuals with lower education levels. Male advisors are more likely to commit misconduct following newspaper closures than female advisors. The sensitivity of advisors’ job turnover to misconduct decreases after closures, suggesting a lower cost of committing misconduct. Our evidence indicates that local newspapers play a distinct role in mitigating financial advisor misconduct, as media exposure raises the costs of misbehavior.

Abstract We document that climate-triggered institutional portfolio rebalancing affects S&P 500 firms’ cost of equity through climate change price pressure (CCPP). Using a demand-based asset pricing framework, we estimate firm-level CCPP from physical and transition exposures over 2005–2021. A one-standard-deviation intensification of CCPP raises the cost of equity by up to 6% of its average, with banks and insurers as the main drivers. Yet firms do not subsequently improve environmental performance, indicating that the statistically significant effect of CCPP on cost of equity is ineffective to alter corporate behavior. Our CCPP metrics can help policymakers and investors design targeted environmental strategies.

Abstract This article studies how cultural heritage influences the differences in risk taking in financial markets. We combine data on the asset allocation of second-generation immigrants in Sweden with risk-taking culture in their parents’ countries of origin. We find that descendants of risk loving cultures are more likely to participate in equity markets, and, conditional on participation, allocate a larger share of financial wealth to equities. Moreover, they take on more idiosyncratic risk by favoring directly held stocks over mutual funds and forming more volatile portfolios. These findings are not driven by selective migration or other country of origin characteristics.

Abstract Using firms’ online job postings, we identify economically related peer firms in the labor market. Firms’ labor peers are vastly different from their industry peers, where the overlap is about 20%. Returns of labor-linked firms strongly comove, suggesting common responses to labor market shocks on average. However, industry shocks can affect firms outside the industry through the labor network, leading to substitution effects between labor peers. Last, we show that investors do not promptly incorporate news about labor-linked firms, leading to predictable subsequent returns. A long-short strategy exploiting this delay generates an average annualized excess return of 9%.

Abstract We conduct the first comprehensive study of blockchain currencies—stablecoins pegged to fiat currencies and traded on decentralized exchanges (DEXs). Using transaction-level data linked to wallet characteristics, we show that prices in these markets are generally efficient, though constrained by blockchain frictions such as gas fees and Ether volatility. DEX rates closely track traditional currency markets through arbitrage and informed trading. Traders with substantial market share and access to primary markets exert greater price impact, reflecting informational advantages. While blockchain markets may improve access for customers excluded from traditional venues, their scalability depends on addressing frictions inherent to decentralized trading.