I provide novel evidence on the real costs of political interference in bank lending. Analyzing staggered state elections in India, I show that politically motivated increased bank lending to farmers before elections crowds out lending to manufacturing firms. These lending distortions are larger where farmers have more political weight and where incumbents have more influence over banks. Reduced bank credit forces manufacturing firms to cut production and operate at lower factor utilization. I also provide evidence suggesting politically motivated increased agricultural lending before state elections contributed towards excessive indebtedness of farmers and a subsequent costly bailout in 2008.

Margin capacity, defined as the aggregate excess debt capacity of investors buying securities on margin, strongly predicts (i) lower S&P 500 returns, (ii) lower growth in aggregate earnings, dividends, employment, and overall economic activity, (iii) higher macro, financial, and policy uncertainty, (iv) lower interest rates, (v) tighter lending standards by banks, and (vi) lower intermediary equity capital. High margin capacity is a precursor, not a response, to borrowing and intermediary constraints and higher volatility. It typically arises when levered investors with profitable past positions limit their leverage. We interpret that it reflects informed investors’ conservatism ahead of bad times.

In this article, we survey the literature that studies fixed-income trading rules and outcomes, including Treasury securities, corporate and municipal bonds, and structured credit products. We compare and contrast the microstructure and regulation of fixed-income markets with equity markets. We highlight the nature of over-the-counter trading in the face of search costs and the associated slow evolution of electronically facilitated intermediation. We discuss the databases available to study fixed-income microstructure, as well as measures and determinants of trading costs, and the important roles dealer networks and limited transparency play. We also highlight unresolved issues.

We examine whether corporate bankruptcies influence bank loan characteristics of geographically proximate firms. Controlling for industry contagion and local economic conditions, firms headquartered near a bankruptcy event experience a 7 basis point increase in loan spreads. The effect is transitory and cannot be fully explained by local correlated information or lenders’ financial health. Instead, the effect is more pronounced for informationally opaque bankruptcies and borrowers, and weakened among loans with relationship lenders and lenders with significant local presence.

We examine whether professional money managers overreact to large climatic disasters. We find that managers within a major disaster region underweight disaster zone stocks to a much greater degree than distant managers and that this aversion to disaster zone stocks is related to a salience bias that decreases over time and distance from the disaster, rather than to superior information possessed by close managers. This overreaction can be costly to fund investors for some especially salient disasters like hurricanes and tornadoes: a long-short strategy that exploits the overreaction generates a significant DGTW-adjusted return over the following 2 years.

We use variation in real estate prices as exogenous shocks to firms’ debt capacity to study the causal effect of financial flexibility on payout policy. We show that an increase in financial flexibility results in higher dividends, share repurchases, and payout flexibility. We find that a 1-standard-deviation increase in a firms’ collateral value results in 0.26- and 0.55-percentage-point increases in nondiscretionary and discretionary payouts, respectively. This effect is stronger for firms with few investment opportunities. Moreover, highly leveraged firms are more likely to cut dividends in response to a sharp decrease in their financial flexibility.

We show that hedge funds gain an information advantage from their prime broker banks regarding the banks’ corporate borrowers. The connected hedge funds make abnormally large trades in the stocks of borrowing firms prior to loan announcements, and these trades outperform other trades. The outperformance is particularly strong for trades of hedge funds that have high revenue potential for prime broker banks. These informed trades appear to be based on information not just about the loan itself but also about firms’ fundamentals such as future earnings. Finally, we find evidence suggesting that equity analysts inside the banks are one potential conduit of information transfer.

We investigate the dynamics of heterogeneous beliefs and link them to the volatility pattern throughout the seasoned equity offering (SEO) event window. In sync with a reduction in information asymmetry related to management information releases around the SEO event, belief heterogeneity declines. Moreover, heterogeneity in beliefs, proxied by either analyst- or institutional-trade-based measures, is a robust and salient determinant of SEO firm volatility, which provides an explanation for the volatility timing “puzzle” identified in the SEO market. Furthermore, the relation between heterogeneous beliefs and return volatility weakens as short sale constraints tighten, suggesting a potential causal link.