We introduce a new hybrid measure of stock return tail covariance risk, motivated by the underdiversified portfolio holdings of individual investors, and investigate its cross-sectional predictive power. Our key innovation is that this covariance is measured across the left tail states of the individual stock return distribution, and not across those of the market return as in standard systematic risk measures. We document a positive and significant relation between hybrid tail covariance risk (H-TCR) and expected stock returns, with an annualized premium of 9%, in contrast to the insignificant or negative results for purely stock-specific or systematic tail risk measures

This paper explores the determinants of financial development by focusing on the role played by barriers to the diffusion of financial technology. These barriers are measured using human genetic distance from the technology frontier. The results based on cross-sectional data for 123 countries suggest that genetic distance to the global frontier has an economically and statistically significant effect on financial development, in that countries that are genetically far from the technology leader tend to have lower levels of financial development. Genetic distance is found to have the largest effect, even after controlling for other determinants of financial development established in the literature. These findings indicate that cultural barriers to the diffusion of financial technology across borders impact financial development by influencing the follower countries’ ability to adopt and adapt innovations from the frontier

Collateral frictions have a profound effect on our economic landscape, ranging from the design of financial securities, laws, and institutions, to various rules and regulations. We analyze a model with disagreement, where securities and collateral requirements are endogenous. It shows that the security that isolates the variable with disagreement is “optimal” in the sense that alternative securities cannot generate any trading. In an economy with N states, investors may introduce more than N securities, and markets are still incomplete. The model has several novel predictions on the behavior of basis—the spread between the prices of an asset and its replicating portfolio.

This article introduces a special issue on lessons from the recent crisis on finance, growth, and stability. The papers in the special issue discuss (i) the benefits and risks of financial innovation and regulatory responses to these risks, (ii) the effect of finance and globalization on the real economy, and (iii) the role of government in providing credit guarantees. This introductory article provides a broader view on these issues and closes with ideas on the future research agenda in this field

The institutions for financing owner-occupied housing have not progressed as they should, and the financial innovation that has followed the financial crisis of 2007-2009 has not been focused on improving the risk management of individual homeowners. This paper lists a number of barriers to housing finance innovation, and in light of these barriers, the problems of some major innovations of the past and future: self-amortizing mortgages, price-level adjusted mortgages (PLAMs), shared appreciation mortgages (SAMs), housing partnerships, and continuous workout mortgages (CWMs

We review the literature on the issuance motives, shareholder wealth effects, and design of convertible bonds. Empirical studies on convertible debt issuance mainly focus on testing the predictions of four traditional theoretical models based on convertibles' potential to mitigate agency or adverse selection costs, and obtain mixed evidence. Recent studies on shareholder wealth effects of convertible bond issues highlight the need to control for arbitrage-related short selling and post-issuance risk changes. Studies on the determinants of convertible bond design uncover earnings management, as well as catering incentives to convertible arbitrage funds, as important determinants of innovations in convertible bond characteristics. Overall, our review indicates that recent empirical research on convertible debt provides valuable insights into issue motives and determinants of financial innovations, but also considers the broader question of how investor demand characteristics impact corporate finance decisions. We conclude with an overview of potential research questions to be addressed by future research on hybrid securities

We explore the impact of reduced transaction costs on risk sharing by estimating the effects of a mobile money innovation on consumption. In our panel sample, adoption of the innovation increased from 43 to 70 percent. We find that, while shocks reduce consumption by 7 percent for nonusers, the consumption of user households is unaffected. The mechanisms underlying these consumption effects are increases in remittances received and the diversity of senders. We report robustness checks supporting these results and use the four-fold expansion of the mobile money agent network as a source of exogenous variation in access to the innovation

We model technological progress as an external effect of organizational design, focusing on how factories, based on labor division, could spawn the Industrial Revolution. Dividing labor, as Adam Smith argued, facilitates invention by observers of production processes. However, entrepreneurs cannot internalize this benefit and choose labor division to facilitate monitoring. Equilibrium with few entrepreneurs features low wage shares, and high specialization, but a limited market for innovations. Conversely, with many entrepreneurs, there is a large market for innovation but little specialization because of high wage shares. Technological progress therefore occurs with a moderate scarcity of entrepreneurs. Institutional improvements affect growth ambiguously

Venture capitalists (VCs) often serve on the board of mature public firms long after their initial public offering (IPO), even for companies that were not VC-backed at the IPO. Board appointments of VC directors are followed by increases in research and development intensity, innovation output, and greater deal activity with other VC-backed firms. VC director appointments are associated with positive announcement returns and are followed by an improvement in operating performance. Firms experience higher announcement returns from acquisitions of VC-backed targets following the appointment of a VC director to the board. Hence, in addition to providing finance, monitoring and advice for small private firms, VCs play a significant role in mature public firms and have a broader influence in promoting innovation than has been established in the literature

Venture capitalists (VCs) often serve on the board of mature public firms long after their initial public offering (IPO), even for companies that were not VC-backed at the IPO. Board appointments of VC directors are followed by increases in research and development intensity, innovation output, and greater deal activity with other VC-backed firms. VC director appointments are associated with positive announcement returns and are followed by an improvement in operating performance. Firms experience higher announcement returns from acquisitions of VC-backed targets following the appointment of a VC director to the board. Hence, in addition to providing finance, monitoring and advice for small private firms, VCs play a significant role in mature public firms and have a broader influence in promoting innovation than has been established in the literature