Knowledge that Transforms

Abstract This paper introduces a key factor influencing households’ decision to invest in the stock market: how people view stockholders. Using surveys we conducted with nearly 8,500 individuals from 11 countries, we document that a large majority hold negative views of stockholders based on identity-relevant characteristics. Linking survey and administrative data, we find that negative perceptions strongly predict households’ stock market participation. We show that negative perceptions causally influence household decision-making and provide evidence supporting identity concerns as the underlying mechanism. Our findings provide new perspectives on the malleability of financial decision-making and a novel explanation for low stock market participation.

Abstract Why do individuals pay debt interest when they could use their savings to pay down the debt? We explore why individuals “cohold” debt and savings using detailed and highly disaggregated daily-level data on household finances. We find that coholding mostly occurs in short spells within the month and the level of coholding is typically modest. Periods of coholding are not associated with shocks at the individual level. We show that mental accounting has a role to play in explaining coholding, in particular how individuals allocate different categories of expenditure to accounts in credit and debit.

Abstract We develop a dynamic theory of “Partial Equilibrium Thinking” (PET), which micro-founds time-varying return extrapolation: extrapolative beliefs are present at all times, but only sometimes manifest themselves in explosive ways. We formalize the distinction between normal times shocks and “displacement shocks,” and study their interaction with extrapolative beliefs. In normal times, PET generates constant extrapolation and momentum. After a displacement shock that increases uncertainty, PET leads to stronger and time-varying extrapolation, triggering bubbles and endogenous crashes. Our theory sheds light on both market dynamics in normal times and Kindleberger’s narrative of bubbles within a unified framework.

Abstract This paper investigates how capital supply from mutual funds affects municipal bond financing, making three key contributions. First, we introduce an identification strategy using the rule-based update of Morningstar ratings for 5-year-old funds, isolating supply-side effects from fund and issuer fundamentals. The results indicate that exogenous fund flows increase bond issuance probability and decrease yields. Second, these fund flows lead to more issuances when funds and issuers are connected through underwriters, highlighting relationship lending in municipal bond financing. Third, municipal issuers leverage favorable financing conditions for new issuance of revenue bonds, which translates into higher local house prices.

Abstract We examine the role of insurance companies in supporting resiliency in the corporate bond market. We show that during the COVID-19 liquidity crisis, insurers increased their corporate bond positions, particularly in bonds facing fire sales by mutual funds. Insurers with more stable funding were more likely to buy, and they bought more from dealers with whom they had prior trading relationships. Dealers improved their bond liquidity provision when they had trading relationships with insurers with more stable funding. Our work demonstrates that insurers can play an important role in supporting bond market resiliency during times of stress.

Abstract Do real assets protect against inflation? Stocks’ core inflation betas are negative, while their energy betas are positive. Currencies, commodities, and real estate mostly hedge against energy inflation, but not core inflation. These hedging properties are reflected in the prices of inflation risks: only core inflation carries a negative risk premium, and its magnitude is consistent within and across asset classes, uniquely among macroeconomic risk factors. Energy inflation has become more procyclical and volatile since the 1990s, which helps explain the time-varying correlation between stock and bond returns. A two-sector New Keynesian asset pricing model accounts for these facts quantitatively.

Abstract We study the contribution of banks and nonbanks to cyclical fluctuations in the supply of syndicated loans. We find that a reduction in nonbank lending explains most of the contraction in syndicated credit and the associated employment losses during the Global Financial Crisis, while banks’ contribution is small. Looking over multiple cycles, we find nonbanks’ credit supply is roughly three times as cyclical as banks’, suggesting that nonbanks are the main drivers of syndicated lending cycles. A model in which government support stabilizes bank funding can explain the higher cyclicality of nonbanks.

Abstract When members of the same household have different risk preferences, whose preference matters more for investment decisions and why? We propose an intrahousehold model that aggregates individual preferences at the household level as a result of bargaining. We structurally estimate the model, analyze the determinants of bargaining power, and find a significant gender gap. Gender differences in individual characteristics, as well as gender effects, partially explain the gap. These patterns hold broadly across Australia, Germany, and the United States. We further link the distribution of bargaining power to households’ perceived gender norms in a cross-sectional analysis. (JEL G11, G41, G50)

Abstract We first document that, despite potential legal issues, overlapping directors are surprisingly prevalent among direct competitors. Using panel data regressions and plausibly exogenous shocks, we find that competing firms in markets with dense overlapping-director networks experience innovation herding, lose product differentiation, and, ultimately, perform poorly. Novel text-based network propagation tests of technologies show that intellectual property leakage plays a role as firms with dense overlapping director networks experience faster propagation of technologies to competitors. Our findings suggest a coordination problem where industry participants cannot stop rivals from earning small gains from leakage despite much larger industry-wide negative externalities.

Abstract Previous research shows that incentives to meet short-term earnings targets can cause firms to increase share buybacks, leading to cuts in investments and employment. Using plant-level census data, we find that incentives to engage in earnings-per-share-motivated buybacks result in lower productivity at both the plant and firm level. We attribute this productivity drop to two mechanisms: reduced investment in productivity-augmenting technology, and inefficient allocation of resources across a firm’s plants. We identify multiple frictions—including labor unions, financial constraints, agency problems, and adjustment costs—that can constrain efficient reallocations across plants and thus exacerbate the consequences of firms’ short-term incentives.