This article shows that a CEO’s trust enhances innovation within a firm, providing a novel micro-foundation for the well-known trust-growth relationship. I build a new matched CEO-firm-patent data set covering 5,753 CEOs in 3,598 U.S. public firms and 700,000 patents during 2000–2011. I exploit variation in generalized trust across CEO ethnic origins, inferred from their last names using deanonymized historical censuses. Following CEO turnovers, a one standard deviation increase in a CEO’s generalized trust is associated with 6% more future patents and 4%–6% higher average patent quality, driven entirely by higher-quality patents. Text analysis of employee reviews shows that the CEO’s trust enhances a firm’s trust culture. These results are consistent with insights from qualitative interviews suggesting that the CEO's trust and the firm’s trust culture encourage researchers to undertake high-risk explorative research and development. In addition, changes in the CEO’s bilateral trust toward inventors in different countries have comparable effects on inventors’ patenting, controlling for CEO and other fixed effects.

We examine how banks manage carbon transition risk by selling loans given to polluting borrowers to less regulated shadow banks in securitization markets. Exploiting the election of Donald Trump as an exogenous shock that reduces carbon transition risk, we find that banks engage in regulatory arbitrage and use brown loan securitization to manage their exposure to carbon transition risk. Banks are more likely to securitize brown loans when carbon transition risk is high but keep these loans on their balance sheets when the risk is reduced. In addition, securitization enables banks to offer lower interest rates to polluting borrowers but does not affect the supply of green loans. Our findings are more pronounced among banks with low levels of capitalization, domestic banks, and banks that do not display green lending preferences. We discuss how securitization can weaken the effectiveness of bank climate policies.

This paper investigates whether the relative liquidity of a firm's bonds versus its stock affects its capital structure choice. As capital structure decisions involve balancing the costs and benefits of different financing alternatives, the relative liquidity of bonds versus stock plausibly matters since a relative liquidity differential might lead to one financing option being materially (relatively) cheaper than the other. As predicted, we find some evidence that, other things being equal, firms with relatively more liquid bonds compared to stock have higher leverage. While the relationship between bond-stock relative liquidity and leverage is statistically significant, our evidence suggests that it comes with only modest economic importance.