The second special issue on big data in finance showcases advancements in research related to data of large size, high dimension, and complex structure since the first NBER/RFS big data conference. The papers published in this next chapter address some questions that were proposed in the initial special issue in 2021. Other papers are more directly connected to recent developments in the markets. We discuss some new research directions, following on the papers published here. They include evaluating market microstructure reforms, understanding medium-frequency trading, improving missing data imputations, and deepening data valuation. We look forward to more developments to follow.

We assess small banks' responses to announcements of state-level proposals of Privacy Protection Acts (PPAs). Employing a Difference-in-Differences framework, we uncover the proactive actions taken by U.S. small banks in anticipation of these proposals. Our findings reveal that the announcement of PPA proposals leads to a 35.46% increase in IT investment by U.S. small banks, primarily driven by market pressure, with regulatory pressure playing a more limited role. Particularly, evidence suggests that banks with greater competitive threats from their rivals are motivated to enhance their IT investments due to market pressures. However, our research also finds that this surge in IT investment does not immediately translate into benefits for small banks.

This paper contributes to existing climate finance literature by examining how firms' proactive management of carbon risks affects market assessment of their credit risk. Using two quasi-exogenous events involving the 2015 Paris Climate Agreement and the staggered implementation of U.S. state climate adaptation plans, we find that stronger carbon risk management is associated with significantly lower credit default swap spreads. Our results are not driven by firm-level climate exposure, and social or governance risk. Firms with better carbon risk management also exhibit lower subsequent carbon emissions. Our paper highlights the importance of carbon risk management in mitigating credit risk.

This article posits an information channel as an explanation for sudden inflations. Households saving via nominal government bonds face a choice whether to acquire costly information about future government surpluses. They trade off the cost of acquiring information about the surpluses that back bond repayment against the benefit of a more informed saving decision. Through the information channel, small changes in the economic environment can trigger large responses in consumer behavior and prices. This setting explains why there can be long stretches of time during which government surpluses have large movements with little inflation response; then at some point, something snaps, and a sudden inflation takes off that is strongly responsive to incoming fiscal news.

A long-standing and influential view in U.S. correctional policy is that “nothing works” when it comes to rehabilitating incarcerated individuals. We revisit this hypothesis by studying an innovative law-enforcement-led program launched in the county jail of Flint, MI: Inmate Growth Naturally and Intentionally through Education (IGNITE). We develop an instrumental variables approach to estimate the effects of IGNITE exposure, leveraging quasi-random court delays that cause individuals to spend more time in jail before and after the program’s launch. Holding time in jail fixed, we find that one additional month of IGNITE exposure reduces weekly misconduct in jail by 25% and three-month recidivism by 24%, with the recidivism effects growing over time. Surveys of staff and community members, along with administrative test-score records and within-jail text messages, suggest that cultural change and improved literacy and numeracy scores are contributing mechanisms.

We develop a tractable small‐open‐economy framework to characterize the constrained efficient use of the monetary policy rate, foreign exchange (FX) intervention, capital controls, and domestic macroprudential measures. The model features dominant currency pricing, positive premia on local currency debt arising from financiers' portfolio constraints, and occasionally‐binding external and domestic borrowing constraints. We characterize the conditions under which the traditional prescription—relying solely on the policy rate and exchange rate flexibility—remains sufficient, even in the presence of externalities. By contrast, to manage noise trader flows into and out of the local currency debt market, FX intervention and in some cases capital inflow taxes should be used instead of the traditional prescription. Moreover, if a country faces a mix of local currency premia and external borrowing constraints, we establish that certain regulations to limit FX mismatch may alleviate the external borrowing constraint but exacerbate the local currency premia. Finally, we show that capital controls may dominate domestic macroprudential measures in cases when external shocks trigger stress in domestic housing markets.

Antitakeover measures are controversial because the evidence of their net effect on shareholders is mixed. We propose that, for many firms, the potential bonding benefits outweigh the agency costs of the quiet life, explaining the mixed results. We study business combination and poison pill laws as exogenous shocks to takeover vulnerability and use shareholder valuation of internal slack as an indicator of the net effect of takeover protection. Firms susceptible to quiet life agency problems exhibit a decrease in the market-assessed value of internal slack. Conversely, cash appreciates at companies where takeover protection bonds commitments with major counterparties.

We investigate how audit firms balance the tension between professional responsibility and client service by examining changes in partner assignments following adverse internal control opinions (ICOs). We find that partners are significantly more likely to be reassigned when they issued an adverse ICO to any of their clients in the previous year. Further, partners issuing adverse ICOs experience unfavorable changes in their client portfolios in the form of lower fees and less prestigious assignments. We find that consequences are more negative when adverse ICOs are issued to clients that are more important to the local office and that there are no consequences when partners issue continuing adverse opinions to clients they have “inherited” from an original adverse ICO partner. We also find that the consequences are stronger for partners of non‐Big 4 audit firms that are likely to be more sensitive to client service considerations. The negative portfolio effects we observe persist for at least three years, and our findings are robust to restrictions involving mandatory partner rotation and adverse ICOs that lead to client loss. Overall, our results are consistent with adverse ICO partners experiencing negative consequences as audit firms respond to client service incentives in the area of internal controls over financial reporting.

We investigate whether compensation consultants recommend excessive pay to earn repeat business by studying consultant changes. Our results show consultants’ interests are aligned with shareholders’ to appropriately pay the CEO. Boards dismiss consultants making large pay recommendation errors, particularly positive ones. However, powerful or poorly monitored CEOs interfere with such disciplinary turnover, weakening the relation. Peer groups are more likely to change with new consultant appointments. New consultants are less likely to include highly paid executives in the compensation peer group and CEO pay falls following the change. Directors earn higher votes in annual elections when they replace compensation advisors.

We develop a framework to estimate the marginal cost of air pollution regulation and apply it to assess policy efficiency. We exploit a provision of the Clean Air Act that requires new plants to pay incumbent facilities to reduce emissions. This “offset” policy creates hundreds of local pollution markets, differing by pollutant and location. Theory and transaction data suggest that offset prices reveal marginal abatement costs. We compare these prices to marginal benefits of pollution reduction estimated using leading air quality models and find that, on average, marginal benefits exceed marginal costs by more than a factor of ten.