We develop a top-down macro stress test that assesses a community bank's ability to withstand a severe and prolonged period of high credit losses. The model groups banks by geography and subjects them to the 90th percentile chargeoff rates that banks experienced between 2008 and 2012. Because of local data limitations, our historical loss approach better reflects patterns of community bank stress than a linear econometric approach that estimates the relationship between macroeconomic conditions and bank performance. We put all U.S. community banks at year-end 2017 through the test and highlight two results. First, banks are much better prepared to withstand an adverse shock than they were on the verge of the financial crisis because banks have shifted away from the riskiest loan types. Second, the Tax Cuts and Jobs Act of 2017 has increased bank insolvency risk from an adverse shock in 2018 because the higher bank capital is more than offset by the weaker automatic stabilizer effect from operating losses.

We present and empirically implement an equilibrium labor market search model where risk-averse workers facing medical expenditure shocks are matched with firms making health insurance coverage decisions. We use our estimated model to evaluate the equilibrium impact of many health care reform proposals, including the 2010 Affordable Care Act (ACA). We use the estimates of the early impact of the ACA as a model validation. We find that income-based subsidies for health insurance premiums are crucial for the sustainability of the ACA, while the ACA can still substantially reduce the uninsured rate without the individual or the employer mandate.

To understand the link between financial intermediation activities and the real economy, we build a general equilibrium model in which agency frictions in the financial sector affect the efficiency of capital reallocation across firms and generate aggregate economic fluctuations. We develop a recursive policy iteration approach to fully characterize the nonlinear equilibrium dynamics and the off-steady-state crisis behavior. In our model, adverse shocks to agency frictions exacerbate capital misallocation and manifest themselves as variations in total factor productivity at the aggregate level. Our model endogenously generates countercyclical volatility in the aggregate time series and countercyclical dispersion in the marginal product of capital and asset returns in the cross-section.

Matsumoto (2020) pointed out data and coding errors in Fang and Gong (2017). We show that these errors have limited impacts: all qualitative findings remain after correcting them. Matsumoto also discussed potential service overcounting in the aggregated utilization data we used to illustrate our method, and then quantified the extent of overcounting with a sample of Medicare claims. We acknowledge the issue but discuss the noise and the bias in his quantification. Overall, our proposed method remains useful, as regulators who are interested in applying the method are unlikely to be subject to the data limitations. (JEL H51, I13, I18, J22, J44)

This study examines the relation between a firm’s supply chain hierarchical position and its information quality. We predict that firms located in a more upstream position within the supply chain network are exposed to greater demand variance, thereby leading to decreased quality of reported earnings and greater uncertainty in the public information available to investors. Consistent with this prediction, we find that firm’s vertical position in the supply chain network is negatively associated with its information quality (i.e., poorer earnings quality and higher stock return synchronicity). Our results are robust to the matched sample analysis, residual analysis, and alternative measures of information quality. We further show that the positive relation between firm’s hierarchical position and stock return synchronicity is more pronounced for firms facing higher information asymmetry. Overall, our findings suggest that a more upstream position in the supply chain network entails not only operational costs associated with amplified demand uncertainty but also costs related to the quality of reported information on which capital providers and other stakeholders rely.

This paper investigates the effects of CEO’s social network on bank risk-taking. We document a positive relation between bank CEO’s social connections and bank risks. To address the endogeneity concerns, we use deaths and retirements within networks to perform a difference-in-difference analysis, and find robust results. We also report that well-connected bank CEOs take more risk when more of their social ties are linked to informationally opaque firms and when the labor market offers fewer employment options. In addition, diversity of social ties (professional and educational) helps to mitigate the impact on risk. Finally, this study reveals an inefficient trade-off between bank risk and return, suggesting that executive social networks lead to excessive bank risk.

We utilize the staggered adoption of the Inevitable Disclosure Doctrine (IDD) by U.S. state courts as an exogenous shock to the proprietary costs of disclosure and study the impact of the IDD on corporate financial reporting policy. We find compelling evidence that firms headquartered in states that adopt the IDD exhibit a significant increase in financial reporting opacity relative to firms headquartered in states that fail to adopt the IDD. Our finding is robust to a battery of sensitivity tests. Cross-sectional evidence shows that the impact of the IDD on opacity is more pronounced for firms with weak external monitoring. Further, our path analysis shows that financial reporting opacity engendered by the adoption of the IDD had broad negative consequences for capital market investors.

In this paper, we examine the effect of managerial overconfidence on bank loan spreads. Our theoretical model and empirical results support that firms with highly overconfident CEOs have lower loan spreads and that the reducing effect of these CEOs on the spread is more pronounced when the loan contracts have collateral or covenants. Unlike firms with highly overconfident CEOs, firms with moderately overconfident CEOs do not receive lower loan spreads. We perform various tests to alleviate the concerns about endogeneity, and the results are robust. The results are consistent with the idea that highly overconfident CEOs are more willing to pledge collateral and accept covenants in exchange for a reduction in their loan rate.

We study contests in which contestants are homogeneous and have convex effort costs. Increasing contest competitiveness, by making prizes more unequal, scaling up the competition, or adding new contestants, always discourages effort. These results have significant implications: although often criticized as evidence of laxity or cronyism, muting competition (e.g., adopting softer grading curves or less high-powered promotion systems) can both reduce inequality and increase output. Holding promotion contests at the division level rather than the firm level can boost employees’ effort. Our results are also consistent with personnel policies that feature egalitarian pay systems and dismissal of worst-performing employees.