We investigate whether the U.S. stock market disciplines asset-backed commercial paper (ABCP) liquidity guarantors who exploit a regulatory loophole that exempts at least 90% of the risk capital charge. We find that the market reduces liquidity guarantors’ franchise value when a short ABCP maturity causes the conduit credit losses to remain with guarantors rather than being transferred to investors. Banks with franchise value more sensitive to the ABCP guarantee cost maintain a higher risk capital buffer. We interpret our findings as evidence that market discipline–complexity of the shadow banking system notwithstanding–alleviates the consequence of regulatory arbitrage.

We investigate the changes in risk sensitivities of interest rates following a shift in Prosper.com's pricing mechanism from auctions to posted prices. We find that the shift leads to reduced sensitivities of loan pricing to credit risk. Furthermore, this change results in higher profits for the platform while investors receive less compensation for the credit risk they undertake. Additionally, borrowers encounter less credit rationing. Analyses of repeat borrowers under both pricing regimes and tests with data under Prosper's upgraded posted prices confirm these findings. We argue that less risk-based pricing results from the incentives of the lending platform.

We examine how search frictions affect merger outcomes. Exploiting firm connections in common bank networks (CBNs) as a channel for reducing search costs, we show that like-buys-like mergers are more probable between firms connected through a CBN. This effect is amplified if the connection has been recently formed or the network contains many plausible choices for merger partners. CBN-facilitated mergers exhibit higher synergy and lower post-merger cost of debt. We confirm that CBNs reduce search costs even after alternative explanations are considered. These findings highlight the importance of search in the process of redrawing firm boundaries.