We document that return anomalies related to management discretions are mitigated for firms followed by more experienced analysts. Nonetheless, only experience directly covering the firm matters while experience covering other firms is not associated with greater price efficiency. Focusing on the accrual anomaly, we then examine research and monitoring as possible channels through which experience mitigates mispricing. For firms followed by more experienced analysts, we find that forecast revisions and stock prices respond more positively to the accrual component of earnings. We further find that accrual quality is higher in firms followed by more experienced analysts, which holds after using both propensity score matching and exogenous events of brokerage closures and mergers to control for endogeneity. Collectively, our results are consistent with monitoring being the primary mechanism by which experienced analysts reduce accrual mispricing.

We develop a new approach for the identification of Pareto‐improving tax reforms. This approach yields necessary and sufficient conditions for the existence of Pareto‐improving reform directions. A main insight is that “Two brackets are enough”: When the system cannot be improved by altering tax rates in one or two income brackets, then there is no continuous reform direction that is Pareto‐improving. We also show how to check whether a given tax reform is Pareto‐improving. We use these tools to study the introduction of the Earned Income Tax Credit (EITC) in the United States in 1975. A robust finding is that, prior to the EITC, the U.S. tax‐transfer system was not Pareto‐efficient. Under plausible assumptions about behavioral responses, the 1975 reform was not Pareto‐improving. Qualitatively, though, it had the right properties: A similar reform with earnings subsidies made available to a broader range of incomes would have been Pareto‐improving.

This study experimentally tests a low-cost, Internet-based,online literacy intervention program implemented with the largest employer-based pension fund in Italy. This program, called Financial Education and Planning for a Long Life (Finlife) included: 1) an online instructional video on financial, and demographic (survival) literacy; 2) an experimental design to evaluate the impact of the online videoprogram on financial and demographic literacy, as well as and on short-term behavioral changes in behavior; and 3) a follow-up to assess the impact of the videoprogram on subsequent choices of available investment lines in the Italian pension fund. Finlife was designed as a low-cost and, scalable approach aimed at increasing financial and demographic survival literacy, which is consistent with a ‘nudge’ philosophy. Based on the findings, Finlife significantly increased the financial and demographic survival literacy of the participants, and pushed them towards seeking more information and becoming more active in financial decisions.

Using novel supervisory data reported in the Volcker metrics, we examine how the internal risk limits of bank-affiliated corporate bond dealers evolved from 2017 to 2020 as indication of capacity constraints on their market making activity. We document that dealers’ internal risk limits came closer to binding during the March 2020 market turmoil. Although dealers eased their limits to accommodate increased liquidity demand, limit adjustments were not enough to offset the increase in risk exposures. We find limit tightness is negatively associated with subsequent inventory growth at dealers’ bond trading desks, especially during the COVID-19 crisis or on days with limit changes. Overall, our results indicate the importance of internal risk limits in driving dealers’ liquidity provision in time of stress.

We find that the tail risk of a firm's stock returns is positively affected by the tail risk of other firms held by the same common institutional blockholder (CIB). The CIB peer effect on tail risk increases (decreases) after exogenous initiations (terminations) of peer connections via CIB ownership, consistent with a causal interpretation. Our findings support the disclosure herding hypothesis, which predicts that firms release bad news after other firms’ bad news announcements. In addition, commonality in the real investment decisions of a firm and its CIB peers, along with the common trading pressure of these firms, contribute to the positive relationship between firms’ tail risk, highlighting the multifaceted roles of institutional investors in the contagion of firms’ tail risk. Finally, the CIB peer effect on tail risk is stronger when the CEO is more risk averse, CIBs hold more shares, or CIBs are pressure-sensitive (i.e., banks and insurance companies).

Implicit guarantees provided by financial intermediaries are a key component of China's shadow banking sector. We show theoretically that project screening by intermediaries, accompanied by their implicit guarantees to investors, can be the second-best arrangement and mitigate capital misallocation that favors state-owned enterprises (SOEs). Using a dataset of trusts’ investment products, we find, consistent with our model, that ex ante expected yields reflect borrower risks and implicit guarantee strength, and risk sensitivity is reduced by strong guarantees. Regulations in 2018 restricting implicit guarantees lead to a weaker relationship between yield spread and guarantee strength, and more credit rationing of non-SOEs.

Abstract Inflation expectations and the associated pass-through of oil price shocks depend on demand and supply conditions underlying the global oil market. We establish this result using a structural VAR model of the global oil market that jointly identifies transmissions of oil demand and supply shocks through real oil prices to both expected and actual inflation. We demonstrate that economic activity shocks have a significantly longer-lasting effect on inflation expectations and actual inflation than other types of real oil price shocks, and resolve disagreements around the role of oil prices in explaining the missing deflation puzzle of the Great Recession.

We explore in a series of incentivized experiments how stock market developments affect emotional arousal (proxied by pupil dilation, electrodermal activity, and heart rate variation), and how this emotional arousal affects investment behavior. Experiencing stock market downswings increases emotional arousal, while upswings do not trigger such an effect. The subsequent interplay between emotional arousal and investment behavior is by no means one-dimensional. The heightened level of emotional arousal after downswings reduces financial risk taking and thus the money put at stake, while the exposure to financial risks itself increases subsequent emotional arousal.

ABSTRACT Approaches to risk governance are not homogeneous across organizations. Some organizations invest heavily in building formal and strategically focused enterprise-wide risk governance processes whereas others exhibit reduced formality and focus, allowing risk governance to be less structured. We argue that risk governance may best be described as a service dependent upon a network (or ecosystem) of participants who include users of risk information and providers who design and implement risk governance processes. Using a survey sample of 2,380 observations from 2011 to 2016, we find that external calls for enhanced risk governance are positively associated with risk governance processes having greater formality and strategic focus. We find this relationship is partially mediated by internal demands for enhanced risk governance. Further, we find that the positive association between internal demands and enhanced risk governance is reduced by resource constraints and that a risk-seeking attitude is negatively associated with enhanced risk governance. Data Availability: Contact the authors. JEL Classifications: G30; M10; M14; M40.

We examine the association between enhancement in a firm's information environment via options trading and firm investment efficiency. Investment inefficiency is partly driven by information asymmetries between firm managers and capital providers, aggravating moral hazard concerns. We test whether enhancement in a firm's information environment through higher volumes of options trading (including a natural experiment involving exogenous shocks via the Penny Pilot Program) is positively related to more efficient firm investment decisions. Our results confirm that enhanced informational efficiency via higher volumes of options trading is positively related to improvements in firm-level investment efficiency. Our findings are in line with the enhancement in the information environment stemming from options trading reducing agency and moral hazard concerns (an agency channel) and are not driven by alternative explanations such as managerial learning from informed traders or a lower cost of capital. Overall, our findings suggest that an enhanced information environment via more options trading benefits firms’ investment decisions.