We find that corporate loan contracts frequently concentrate control rights with a subset of lenders. Despite the rise in term loans without financial covenants—so-called covenant-lite loans—borrowing firms’ revolving lines of credit almost always retain traditional financial covenants. This split structure gives revolving lenders the exclusive right and ability to monitor and to renegotiate the financial covenants, and we confirm that loans with split control rights are still subject to the discipline of financial covenants. We provide evidence that split control rights are designed to mitigate bargaining frictions that have arisen with the entry of nonbank lenders and became apparent during the financial crisis.

Abstract International financial integration helps to diversify risk but also may spread crises across countries. We provide a quantitative analysis of this trade-off in a two-country general equilibrium model with collateral-constrained borrowing using a global solution method. Borrowing constraints bind occasionally, depending upon the state of the economy and levels of inherited debt. We examine different degrees of international financial integration, moving from financial autarky, to bond and equity market integration. Financial integration leads to a significant increase in global leverage, substantially escalates the probability of crises for any one country, and dramatically increases the degree of “contagion” across countries. Outside of crises, the impact of financial integration on macroeconomic aggregates is relatively small. But the impact of a crisis with integrated international financial markets is much less severe than that under financial market autarky. Thus, a trade-off emerges between the probability of crises and the severity of crises. Using a large cross-country database of financial crises in developing and developed economies over a forty-year period, we find evidence in support of the model.

We find that bond issues have substantially increased since the onset of the COVID-19 crisis in calendar week 12 (March 16-20) for bonds rated A or higher, but surprisingly also for bonds rated BBB or lower. In contrast to existing evidence on bond maturities in economic downturns, we document that maturities exceed those of bonds issued before by the same firms as well as the average maturities during normal times. Determinants of corporate bond spreads substantially differ between COVID-19 and normal times. Most prominently, asset tangibility has a highly significant negative effect on spreads during normal times. During COVID-19, this is reversed, especially in industries heavily affected by lockdown measures, reflecting the inflexibility associated with fixed assets. A different picture emerges for equity issues, which slowed considerably during the first 4 weeks of the pandemic, before accelerating again. Capital raised during COVID-19 via equity issues is approximately 5% of capital raised via bond issues.

Abstract We propose a tractable model of an informationally inefficient market featuring nonrevealing prices, general preferences and payoff distributions, but not noise traders. We show the equivalence between our model and a substantially simpler one in which investors face distortionary investment taxes depending on both their identity and the asset class. This equivalence allows us to account for such phenomena as underdiversification. We further employ the model to assess approaches to performance evaluation and find that it provides a theoretical basis for some intuitive practices, such as style analysis, that have been adopted by finance professionals. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract This paper finds that banks and nonbanks respond differently to increased competition in consumer credit markets. Increased competition and a greater threat of failure induces banks to specialize in relationship business lending, and surviving banks are more profitable. However, nonbanks change their credit policy when faced with more competition and expand credit to riskier borrowers at the extensive margin, resulting in higher default rates. These results show how the effects of competition depend on the form of intermediation. They also suggest that increased competition can cause credit risk to migrate outside the traditional supervisory umbrella.

Past studies typically have focused on whether people perceive more rare risk after experiencing catastrophic disasters. We show that people can also feel less risk with unexpected lucky disaster experience. By exploring a novel identification strategy based on households’ expectations, we find that households perceive less (more) risk when they experience disasters that have lower (higher) fatalities than what was expected. This opposite experience effect of rare disasters is substantial. A one standard deviation increase in the negative (positive) experience shock is associated with a 1.71% decrease (a 1.31% increase) in the life insurance-to-portfolio ratio. We discuss three possible mechanisms to account for our empirical findings: incomplete information learning, salience theory, and change in risk preferences.

Abstract We show that time-varying risk premium in financial markets can explain a key, yet puzzling, feature of labor markets: the large differences in unemployment risk across worker age groups over the business cycle. Our search model features a time-varying risk premium and learning about unobserved heterogeneity in worker productivity. Their interaction generates large real effects through firms’ labor policies. Our model predicts higher unemployment risk of younger workers relative to prime-age workers when risk premium is high, and the employment ratio of prime-age to young workers to be more cyclical in high beta industries. We find empirical support for these predictions. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract Rational models claim “trading to learn” explains widespread excessive speculative trading and challenge behavioral explanations of excessive trading. We argue rational learning models do not explain speculative trading by studying day traders in Taiwan. Consistent with previous studies of learning, unprofitable day traders are more likely than profitable traders to quit. Consistent with models of overconfidence and biased learning (but not with rational learning), the aggregate performance of day traders is negative; 74% of day trading volume is generated by traders with a history of losses; and 97% of day traders are likely to lose money in future day trading. Received: March 4, 2019; Editorial decision: May 16, 2019 by Editor: Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

We utilize a fundamentals-based component volatility model to forecast the short-run volatility of exchange rate changes using monetary fundamentals quoted at different frequencies. Specifically, we allow the component volatility model to distinguish short-run exchange rate fluctuations from long-run movements that are directly linked to monetary fundamentals. Relative to more traditional time series volatility models, we find significant improvements in the ability to forecast the daily volatility of exchange rate changes by incorporating the monthly monetary fundamentals’ volatilities as predictors into the component volatility model. In the utility-based comparisons, we find that an investor is willing to pay a positive annual management fee of 5.72% on average to switch from the benchmark model to the fundamentals-based models. Of these models, the model with the symmetric and homogeneous Taylor rule and interest rate smoothing obtains the highest positive annual management fee.