Currencies that are more exposed to US monetary policy yield positive average excess returns. This result holds both for pure monetary policy shocks and for central bank information shocks, identified via sign restrictions on interest rate surprises using high-frequency data. Currency characteristics help explain the heterogeneity of these exposures across currencies and time. We then build exposure indices to gauge this effect around policy announcements. Long-short trading strategies that condition on such exposure indices display significant excess returns after controlling for dollar, carry and momentum factors.

We document that U.S. monetary policy surprises have large, persistent and asymmetric effects on government bond yields worldwide. Moreover, the impact of Fed policy on sovereign debt markets has experienced a structural break around the Global Financial Crisis (GFC). Treasury term premiums increase persistently following Federal Reserve easing shocks until 2007, but show a protracted decline in the post-GFC sample. Advanced and emerging market economy yields essentially mimic the Treasury market's asymmetric response to Fed surprises. While the break of the term premium response to easing shocks around the GFC is consistent with a change in the net duration of primary dealers' Treasury positions, intermediary balance sheet constraints cannot explain the asymmetric effects of monetary policy on yields. The persistent and asymmetric global yield responses are broadly in line with the dynamics of mutual fund

ows following U.S. monetary policy shocks.

This paper studies the feedback between stock market fluctuations and wealth inequality dynamics. We do so by means of a dynamic consumption-based general equilibrium model with endogenous asset returns and a non-degenerate wealth distribution for a continuum of households. Households are heterogeneous in risk aversion and thus choose different expected portfolio returns and portfolio return volatilities, generating time-varying wealth inequality. We show how to solve the model analytically in terms of a cumulant generating function, which encodes information about all the moments of the distribution of risk aversion. With this result, we recover the nobservable distribution of risk aversion using time variation in the slope of the observable equity term structure. We also confront the model with US data on the wealth distribution to recover a second estimate of the distribution of risk aversion. By comparing the two estimates, we show quantitatively that there is significant feedback between stock price dynamics and wealth distribution dynamics

We construct novel measures of net and gross short covering to examine when short sellers exit positions. We find that idiosyncratic limits to arbitrage, such as adverse stock price movements, volatility, and equity lending fees, are associated with significantly higher position closures. In contrast, we find little evidence that aggregate limits to arbitrage, including VIX, funding liquidity, and market liquidity, affect short covering. Short covering predicts future returns in the wrong direction, but only if it is induced by limits to arbitrage, consistent with the hypothesis that short sellers are forced to exit too early. It is also associated with lower price efficiency, higher future anomaly returns, and better performance of other informed traders. These results show that firm-level limits to arbitrage are important determinants of trading behavior and future returns.

Micro-level geographic proximity is associated with higher returns from short selling, with short trades by institutions near the target headquarters followed by more negative abnormal returns. Proximity matters more for stocks that are small, volatile, and have less analyst coverage, as well as for stocks with low market correlations and inefficient prices. Funds exhibiting larger effect of proximity are smaller and have higher returns and idiosyncratic volatility. The relationship between distance and returns is weaker during the COVID-19 pandemic. Overlapping nearby bars and restaurants between target and short seller matter but not during holidays, suggesting social interactions as a channel.

Short-sale costs eliminate the abnormal returns on asset pricing anomaly portfolios. While many anomalies persist out-of-sample, they cannot profitably be exploited due to stock borrow fees. Using a comprehensive sample of 162 anomalies, the average long-short portfolio return is a significant 0.15% per month before short-sale costs, and the returns are due to the short leg.

However, the average is −0.02% once returns are adjusted for borrow fees. The anomalies are not profitable even before accounting for fees if the high-fee observations, 12% of stock dates, are excluded from the analysis. Thus, short sale costs explain why many anomalies persist.

We show that during the period of the Public Sector Purchase Program (PSPP) implemented by the Eurosystem, the prices of German sovereign bonds targeted by the PSPP increase predictably towards month-end and drop subsequently. We propose a sequential search-bargaining model that captures salient features of the implementation of the PSPP such as the commitment to buy within an explicit time horizon. The model can explain the predictable pattern as a result of imperfect competition between dealers that are counterparties to the Eurosystem. Motivated

by the model's predictions, we show that the price pattern is more pronounced (a) for bonds that are targeted by the PSPP, (b) for monthly windows where the Eurosystem has fewer counterparties, and (c) for monthly windows where the Eurosystem targets a larger amount of purchases. We discuss the implications of our analysis for future purchase programs.

It is common practice in finance to use difference-in-differences analysis to examine fixed-income pricing data. This paper uses simulations to show that this method applied to pricing variables that exhibit a term structure, such as yields or credit spreads, systematically produces false and mismeasured treatment effects. This holds true even if the treatment is randomly assigned. False and mismeasured treatment effects result from heterogeneous effects in different parts of the term structure in combination with unequal distributions of residual maturities in the treated and control bond samples. Neither bond fixed effects nor explicit yield-curve control in the specification resolve the issues.

We develop a conditional factor model for the term structure of Treasury bonds, which unifies non-parametric curve estimation with cross-sectional asset pricing. Our factors are investable portfolios and estimated with cross-sectional ridge regressions. They correspond to the optimal non-parametric basis functions that span the discount curve and are based on economic first principles. Cash flows are covariances, which fully explain the factor exposure of coupon bonds. Empirically, we show that four factors explain the discount bond excess return curve and term structure premium, which depends on the market complexity measured by the time-varying importance of higher order factors. The fourth term structure factor capturing complex shapes of the term structure premium is a hedge for bad economic times and pays off during recessions.

We quantify the cost of pledging collateral for small businesses using a revealed preference approach. We exploit a regulatory quirk in which firms are exempt from posting collateral if their loan size is below a threshold. Firms bunch their loans below the threshold, and the resulting distortion in the loan size distribution reveals the magnitude of the collateral cost. The collateral cost is substantial and varies across collateral types, business sectors, and collateral laws in ways consistent with flexibility-based theories. Finally, we introduce the collateral cost into a standard macro-finance model and show that it has important implications for macroeconomic fluctuations.

Using supervisory data from UK central counterparties (CCPs), our paper uncovers persistent collateral cycles in which cash goes back and forth from financial markets to CCPs. In the onward phase of the cycle, clearing members provide cash to CCPs to meet margin requirements. This pattern is procyclical as the pledged collateral increases with market volatility and places upward pressure on repurchase agreement (repo) rates. In the backward phase, CCPs return the cash to the financial markets via reverse repos and bond purchases, in compliance with regulation that requires CCPs to invest their cash holdings in safe assets. The cash given back by CCPs generates downward pressure on repo rates in a countercyclical manner.

The information banks have about borrowers drives their lending decisions and macroeconomic outcomes, but this information is inherently difficult to analyze because it is private. We construct a novel measure of bank information quality from confidential regulatory data that include banks' private risk assessments for US corporate loans. Information quality improves as local economic conditions deteriorate, particularly for newly originated loans and loans with larger potential losses. Our results provide empirical support for theories of countercyclical information production in credit markets.

How do financial frictions affect the type of human capital investments that students make in college? To study this question, I build a novel dataset covering more than 700,000 U.S. students, merging commencement records with address histories, credit bureau records, and professional resumes. I document that students trade off initial earnings against lifetime earnings when choosing college majors and that students from low-income families are more likely to choose majors associated with higher initial earnings but lower lifetime earnings. I provide causal estimates of how student debt affects this trade-off using the staggered implementation of universal no-loan policies across 22 universities from 2001 to 2019. I find that students who are required to take on more student loans to finance their education choose majors with higher initial earnings but lower lifetime earnings. Furthermore, student debt affects students differentially depending on their family backgrounds: Students from low-income families display greater sensitivity to changes in student debt. Finally, I show that differences in student debt amounts lead to different job profiles and earnings later in life. Combined, these findings highlight the role of financial frictions in human capital investments and subsequent labor market trajectories.

Using repeat-sales data on apartments in Sweden, we estimate the gender gap in housing returns. We confirm that single women’s returns gross of renovations are lower than single men’s by more than 2pp, that half of this gap is due to market timing, and that it is concentrated in short holding period. Adding administrative data on renovation expenses and traders’ background, we find that women are much less likely to undertake renovations and to specialize in real estate professional activities. Once these differences are accounted for, we do not find any gender gap in real estate returns.

How do shocks to property taxation affect lifetime wealth accumulation and investment? We examine a unique 18th-century tax reform in Holland which resulted in large and unanticipated changes in the effective tax rates on real estate wealth, plausibly exogenous to the owners and different for each property. We find the reform capitalized into house values in the short-run and had large impacts on household wealth that grew substantially over time. On average, a one percent shock increased wealth at death by 3.5 percent. We show these effects are consistent with the fact that households do not update housing consumption in response to large tax changes: large positive or negative shocks had few impact on the likelihood of selling voluntarily, even in a liquid market with low transaction taxes. Instead, changes in taxation primarily affected annual saving. The shock had a very large impact on foreclosure rates and still affected property-level vacancy and owner-occupancy rates 70 years after the reform. Our findings suggest that shocks to property taxation have large and persistent effects on household wealth and the housing stock.

Banks finance lending with deposits and support the operation of payment system by allowing depositors to freely transfer funds in and out of their deposit accounts. This bundling of financial services creates a liquidity mismatch. Using granular payment data, we characterize a sizeable liquidity risk exposure that banks face due to highly volatile payment flows. Payment risk is a form of funding stability risk that is unique to banks. Our analysis demonstrates the tension between the monetary role and financing role of deposits. We find that payment risk dampens bank lending: An interquartile increase in payment risk is associated with a decline in loan growth that is 10%-20% of its standard deviation. This detrimental effect is amplified by funding stress in broader financial markets and is stronger for undercapitalized banks. Furthermore, payment risk impedes the bank lending channel of monetary policy transmission. Finally, we characterize how banks mitigate payment risk by adjusting deposit rates.

I show that the long-term decrease in the nominal short rate since the 1980s contributed to a decline in banks' supply of business loans, firm investment and new firm creation, and an increase in banks' real estate lending. The driving force behind these relationships was the shift in banks’ funding mix from time deposits (CDs) to savings deposits, which was caused by the decrease in the nominal rate. I show that banks finance business lending with time deposits because of their matching interest-rate sensitivity and liquidity. A lower nominal rate reduces the spread on liquid deposits (e.g., savings deposits), leading households to substitute towards them and away from illiquid time deposits. In response to an outflow of time deposits, banks cut the supply of business loans and increase their price. The decrease in business lending leads to reduced investment at bank-dependent firms and a lower entry rate of firms in industries that are highly reliant on external funding. I document these relationships both in the aggregate, and in the cross-section of banks, firms and geographic areas. For identification, I exploit cross-sectional variation in banks' market power and business credit data. I develop a general equilibrium model which captures these relationships and shows that the transmission mechanism I document is quantitatively important.

Despite a burgeoning literature on Fintech lending that has been occurring from outside the financial industry, less is known about the adoption of Fintech by banks and its implications. We fill this gap by investigating banks’ partnering with Zelle. We document a network effect in banks’ decisions to partner with Zelle as they are positively affected by Zelle penetration in the market that the banks operate. Zelle partnering is followed by higher growth in partnering banks’ deposits and, consequently, small business lending, in the market with greater Zelle penetration. For identification, we rely on (1) estimations of cross-branch variations within a bank to account for bank-level lending opportunities and (2) an exogenous shock to a bank’s Zelle-partnering status due to bank mergers. Overall, our findings are consistent with the interactive nature of banks’ technology adoption and the positive impact of Fintech on banks’ deposit taking and small business lending.

Fluctuations in investor demand dramatically affect firms’ valuation and access to capital. To quantify their real impacts, we develop a dynamic investment model that endogenizes the demand- and supply-side of equity capital. Strong demand dampens price impacts of issuance, facilitating investment and financing, while weak demand encourages opportunistic repurchases, crowding out investment. We estimate the model using indirect inference by matching the endogenous relationship between investor demand and firm policies. Our estimation suggests that investor demand is an important driver of misallocation, compared with financial and real frictions and heterogeneous risk premia. Eliminating excess demand reduces dispersion in the marginal product of capital by 23.8% and productivity losses by 22.3%. With demand fluctuations, firms hold higher cash savings and tend to be larger—excess demand allows firms with financial market power to profit from financial market transactions, contributing to the emergence of superstar firms.

We present a search model that incorporates two key features of securities issuance markets: search for investors and information gathering. In the model, a seller contacts investors sequentially and uses the revealed interest to update the price of the security and to decide whether to terminate the search. We characterize the seller’s optimal strategy, which specifies how to structure the search, when to terminate the search, how to price the security, and how to allocate it to investors. We show how these choices are jointly determined and depend on the quality of investor information and search frictions. Our model provides unique predictions about offer outcomes, such as search length, security valuation, issue costs, underpricing, post-offer returns, and allocations. We find empirical support for these predictions in the setting of accelerated bookbuilt offers of seasoned equity, which involve simultaneous search and information gathering and which have become prevalent in recent years.

We present a model in which informed experts intermediate in the market for going public by acquiring private firms and reselling their shares to public investors. Because information incorporated by the public market generates resale pricing risk for experts, the acquisition prices they pay act as credible signals of firm value. Accordingly, intermediated sales provide a superior alternative for firms that expect to be undervalued in traditional IPOs. We characterize how signaling via the acquisition price affects the sharing of the surplus between the experts and the selling firms. We also analyze the co-existence of intermediated sales and IPOs and the efficiency of the resulting market equilibrium. Our analysis of intermediated sales sheds light on the possible informational roles of transactions such as SPACs and private equity investments.

In a continuous-time game, a risk-neutral decision-maker chooses the volatility of a state variable, and a stopper terminates the game. I provide conditions under which the decision-maker becomes risk averse endogenously and minimizes volatility near termination, even if he faces myopic incentives to gamble for resurrection. The conditions introduce forward-looking incentives to preserve economic rents. I study two applications: a levered corporation and a mutual fund with uncertain productivity. When investors are about to default or withdraw their capital, managers attempt to preserve their rents by minimizing risk. Rents originate from current payoffs, growth opportunities, or managerial overconfidence.

Myers (1977) described how firms can gamble using asset substitution, which is switching to a less efficient and more volatile project. Gambling using derivatives is a sharper instrument, allowing the owners to gamble just to what is needed, and with negligible efficiency loss. In our model, “gambling for redemption” operates at small scale and is socially beneficial, while “gambling for ripoff” operates at large scale and is socially inefficient but benefits firm owners (at the expense of bondholders). Superpriority laws grant Qualified Financial Contracts (QFCs) bankruptcy law exemptions, which make more funds available for gambling. This reduces firm value due to difficulty borrowing in the face of more gambling for ripoff.

We show that short-term debt in a firm’s optimal capital structure reduces investment under asymmetric information. Investors’ interpretation of underinvestment as a positive signal about the quality of the assets in place allows the equity holders to profit from short-term debt repricing at the rollover stage. Thus, underinvestment is more pronounced at shorter maturities, in contrast to Myers (1977). Low types’ incentives to mimic put an endogenous constraint on high types’ underinvestment payoff via a duration floor. Perhaps most strikingly, because cash lowers the duration floor, an increase in a firm’s retained earnings can decrease investment.

Product market rivals often source upstream inputs from the same set of suppliers. Because these inputs are typically sold on credit, sharing a supplier could create incentives for customers to strategically demand trade credit terms in order to prevent the supplier from providing liquidity to rivals. In this paper, we empirically document this strategy and show that customers prolong payable days with suppliers that also sell to their rivals. For identification, we exploit the U.S. government’s QuickPay reform, which permanently shortened the government’s payable days to small business contractors, creating an exogenous liquidity influx. We find that after QuickPay, affected contractors extend more trade credit to their corporate customers. In response, rivals of these corporate customers begin to extract more trade credit from the shared suppliers, indicating their efforts to pull away these suppliers’ liquidity from the competitors already benefiting from QuickPay. Our paper reveals an underexplored incentive in supply-chain relationships, namely, the incentive to avoid “feeding the mouth that bites,” and how it shapes the allocation of trade credit.

The institutional-loan market is segmented and has specialized underwriters. We document that more intense underwriter competition in a given segment is associated with lower initial loan spreads and more upward rate adjustments. We provide evidence that competition affects underwriters' trade-off between bidding low initial rates to win underwriting mandates and incurring reputational costs when adjusting rates upward in the book-building process. Moreover, stronger underwriter competition lowers final loan spreads without resulting in more defaults or hurting borrowers' access to investors. The impact of underwriter competition is moderated by the uncertainty about investor demand and the existence of prior borrower-underwriter relationships.

We study the interconnection between the productivity and pricing effects of financial shocks. Combining administrative records on firm-level output prices and quantities with quasi-experimental variation in credit supply, we show that a tightening of credit conditions has a persistent, yet delayed, negative effect on firms’ long-run physical productivity growth (TFPQ) but also induces firms to change their pricing policies. As a result, commonly used revenue-based productivity measures (TFPR)—which conflate the pricing and productivity effects—offer biased predictions regarding the consequences of financial shocks for firms’ productivity growth, underestimating the long-run elasticity of physical productivity to credit supply by almost half. Moreover, we show that the pricing adjustments themselves also have productivity implications. Firms coping with a contraction of credit use low pricing as a source of internal financing, allowing them to avoid cutting expenditures on productivity-enhancing activities, thereby softening the impact of financial shocks on long-run productivity growth.

Missing data is a prevalent, yet often ignored, feature of company fundamentals. In this paper, we document the structure of missing financial data and show how to systematically deal with it. In a comprehensive empirical study we establish four key stylized facts. First, the issue of missing financial data is profound:

it affects over 70% of firms that represent about half of the total market cap. Second, the problem becomes particularly severe when requiring multiple characteristics to be present. Third, firm fundamentals are not missing-at-random, invalidating traditional ad-hoc approaches to data imputation and sample selection. Fourth, stock returns themselves depend on missingness. We propose a novel imputation method to obtain a fully observed panel of firm fundamentals. It exploits both time-series and cross-sectional dependency of firm characteristics to impute their missing values, while allowing for general systematic patterns of missing data. Our approach provides a substantial improvement over the standard leading empirical procedures such as using cross-sectional averages or past observations. Our results have crucial implications for many areas of asset pricing.

When expected returns are linear in asset characteristics, the stochastic discount factor (SDF) that prices individual stocks can be represented as a factor model with GLS cross-sectional regression slope factors. Factors constructed heuristically by aggregating individual stocks into characteristics-based factor portfolios using sorting, characteristics-weighting, or OLS cross-sectional regression slopes do not span this SDF unless the covariance matrix of stock returns has a specific structure. These conditions are more likely satisfied when researchers use large numbers of characteristics simultaneously. Methods to hedge unpriced components of heuristic factor returns allow partial relaxation of these conditions. We also show the conditions that must hold for dimension reduction to a number of factors smaller than the number of characteristics to be possible without having to invert a large covariance matrix. Under these conditions, instrumented and projected principal components analysis methods can be implemented as simple PCA on certain portfolio sorts.

We study the size and drivers of non-standard errors (Menkveld et al., 2021) in portfolio sorts across 14 common methodological decision nodes and 40 sorting variables. These non-standard errors range between 0.05 and 0.26 percent and are, on average, larger than standard errors. Supposedly innocuous decisions cause large variation in estimated premiums, standard errors, non-standard errors, and t-statistics. The impact of decision nodes varies widely across sorting variables. Irrespective of choices in portfolio sorts, we find pervasively positive premiums and alphas for almost all sorting variables. This suggests that while the size of these premiums is uncertain, their sign is remarkably stable. Our code is publicly available.

Central banks have engaged in a tightening cycle by raising rates, yet decided not to first reduce their balance sheets. We show that the scarcity of government bonds that followed the European Central Bank's Quantitative Easing efforts impeded the transmission of rate hikes to money market rates. When the ECB increased its policy rates by 50bp, the borrowing rate for loans collateralized by the most scarce bonds increased by only 30bp, in the repo market. We show that the lack of pass-through is priced in the yield of government bonds, which increased less for scarcer bonds. Heterogeneous bond holdings across institutions imply that the cost of (collateralized) funding varies significantly across European institutions.

How should monetary policy respond to deteriorating financial conditions? We develop and estimate a dynamic new Keynesian model with financial intermediaries and sticky long-term corporate leverage to show that active response to movements in credit conditions often helps to mitigate losses in aggregate consumption and output associated with macro fluctuations. A (credible) monetary policy rule that includes credit spreads is thus welfare-improving sometimes even obviating the need for explicit inflation targeting.

This paper investigates the stock market implications of the Federal Reserve's ability to control inflation, focusing on investor uncertainty and learning about it. Investor uncertainty about the Fed's ability to control inflation heightens stock market volatility and risk premium, particularly during pronounced monetary tightening and easing cycles. Moreover, investor learning generates an asymmetry that amplifies the impact of inflation surprises when the Fed tightens or loses its inflation control credibility, causing particularly high volatility and risk premium. Empirical tests support our model's predictions, highlighting the importance of investors learning about the Fed's ability to control inflation in shaping financial markets.

We show that firm default risk is the primary predictor of the correlation between corporate bond and stock returns, both in the cross-section and over time. Bonds of less creditworthy firms behave more like the issuing firms’ stocks, resulting in higher future comovement. As a direct implication, investing in bonds and stocks of the most creditworthy firms significantly enhances diversification benefits and Sharpe ratios out-of-sample. We develop a structural model with stochastic asset variance that rationalizes these findings, whereby time-variation in asset variance plays a critical role for breaking down the perfect stock-bond correlation implied by the Merton model.

We examine the role of institutional investors in monetary policy transmission to asset markets by exploiting a discontinuous threshold in the tax treatment of municipal bonds. As bonds approach the threshold, mutual funds, the primary institutional traders in the market, dispose of the bonds at significant risk of falling below the threshold. This is driven by mutual funds anticipating future illiquidity. Once bonds cross the threshold, their liquidity declines and illiquidity-induced yield spreads increase substantially as retail investors become more important in price formation. Unexpected monetary policy tightening sharply reduces trading activity, amplifying the path to illiquidity in the market.

We investigate the scope for active investing in corporate bonds by estimating an optimal portfolio using asset characteristics. Our portfolio weights are modeled to account for the severe trading frictions present in OTC bond markets. A portfolio based on maturity, rating, coupon, and size outperforms passive benchmarks and univariate sorts after transaction costs in and out of sample. Further, it predicts macroeconomic activity, suggesting bond characteristics provide hedging against macro-fluctuations. Active funds appear constrained by narrow investment mandates from holding the optimal portfolio. Overall, while active corporate bond portfolios are feasible, institutional constraints might limit their accessibility.

We study the impacts of global financial sanctions on banks and their corporate borrowers in Russia. Financial sanctions were consecutively imposed between 2014 and 2019, allowing targeted (but not yet sanctioned) banks to adapt their international and domestic exposures in advance. Using a staggered difference-in-differences approach with in-advance adaptation to anticipated treatment, we establish that targeted banks immediately reduced their foreign assets and actually increased their international borrowings, compared to similar other banks. Once sanctioned, however, these banks not only further reduced their foreign assets but also turned to decrease their international borrowings while facing considerable outflow of domestic private deposits. The introduction of government support prevented the banks' disorderly failures and resulted in credit reshuffling: the banks contracted their lending to the domestic corporate sector by at least 4% of GDP and increased household lending by almost the same magnitude, which mostly offset the total economic loss. Further, we introduce a two-stage treatment diffusion approach that flexibly addresses potential spillovers of the sanctions to private banks with political connections. Using unique hand-collected board membership and bank location data, our approach shows that, throughout this period, politically-connected banks were not all equally recognized as potential sanction targets. Finally, using the syndicated loan data, we establish that the real negative effects of sanctions materialized only when sanctioned firms were borrowing from sanctioned banks. (E65, F34, G21, G41, H81.)

We examine how tax evasion affects offshore information production. Using the Foreign

Account Tax Compliance Act (FATCA) as an exogenous shock, we document that affected

offshore asset management companies significantly enhance their performance as a response. This improvement comes from better information processing and is more substantial for tax-sensitive companies. Other policies related to fees and portfolio-based tax management are less affected. Our results reveal a novel substitution effect between tax evasion and information production, suggesting that curbing offshore tax evasion can help improve competitiveness and efficiency in the global asset management industry and related markets.

Increased interdependencies across countries have led to calls for greater harmonization of regulations to prevent local shock from spilling over to other countries. Using the rulemaking process of the Basel Committee on Banking Supervision (BCBS), this paper studies the process through which harmonization is achieved. Through leaked voting records, we document that the probability of a regulator opposing an initiative increases if their domestic national champion (NC) opposes the new rule, particularly when the proposed rule disproportionately affects them. Next, we show that smaller banks, even when they collectively have a higher share in the domestic market, do not have any impact on regulators’ stand – suggesting that regulators’ support for NCs is not guided by their national interest. Further, we find the effect is driven by regulators who had prior experience working in large banks. Finally, we show this unanimous decision-making process results in significant watering down of proposed rules. Overall, the results highlight the limits of harmonization of international financial regulation.

In this paper, we characterise the liquidity provision and price discovery roles of dealers and HFTs in the FX spot market during the sample period between 2012 and 2015. We find that they have different responses to adverse market conditions: HFT liquidity provision is less sensitive to spikes in market-wide volatility, while dealer bank liquidity is more robust ahead of scheduled macroeconomic news announcements when adverse selection risk is high. In periods of extreme levels of volatility, such as the ‘Swiss De-peg’ event in our sample, HFTs appear to withdraw almost all liquidity while dealers remain. In normal times, we also find that HFTs contribute to market liquidity by passively trading against the pricing errors created by dealers’ aggressive trade flows. On price discovery, HFTs contribute the dominant share, mostly through their high-frequency quote updates which incorporate public information. In contrast, dealers contribute to price discovery more through trades that impound private information.

We let “Algorithmic Market-Makers” (AMs), using Q-learning algorithms, choose prices for a risky asset when their clients are privately informed about the asset payoff. We find that AMs learn to cope with adverse selection and to update their prices after observing trades, as predicted by economic theory. However, in contrast to theory, AMs charge a mark-up over the competitive price, which declines with the number of AMs. Interestingly, markups tend to decrease with AMs’ exposure to adverse selection. Accordingly, the sensitivity of quotes to trades is stronger than that predicted by theory and AMs’ quotes become less competitive over time as asymmetric information declines.

We find that clients with stronger past trading relationships with a dealer receive consistently better prices in corporate bond trading. The top 1% of relationship clients face a sizeable 67% drop in transaction costs relative to the median client - an effect which is particularly strong during the COVID-19 turmoil. We find clients' liquidity provision to be a key driver of relationship discounts: clients to whom balance-sheet constrained dealers can turn to as a source of liquidity, are rewarded with relationship discounts. Another important motive for dealers to quote better prices to relationship clients is because these clients generate the bulk of dealers' profits. Finally, we find no evidence that extraction of information from clients' order flow is related to relationship discounts.

Using detailed data from the U.S. syndicated loan market, we find that women are persistently under-represented among senior commercial bankers. This gap is not closing over time due to unequal promotion rates between men and women working at the same institution in the same year and cannot be explained by a different individual or managerial performance. The gap is driven more by people than by institutions, with senior bankers both exhibiting assortative matching when switching employers and subsequently shifting the promotion gap in the direction of their previous workplace. We find evidence consistent with parts of the gap being driven by women shouldering more of the burden of family care. Hard credentials or female leadership at the top of banks do not attenuate the gender gap. In contrast, after being targeted by gender discrimination lawsuits, banks increasingly promote women.

The SEC punishes major financial crimes with both monetary fines and professional bars. We document that punishments differ starkly across gender. Female offenders receive longer bars from the finance industry and smaller money penalties than male offenders on average. While men tend to receive combinations of punishment, women receive either professional bars or monetary penalties, but not both. Females are 50% less likely than males to cooperate with the SEC. This evidence is consistent with a model of enforcement where for women admitting guilt through accepting a professional bar entails social stigma. The SEC’s two-dimensional punishment scheme thus entails economic disparities between men and women.

Using data from a lending platform that switched from a human-based to a machine learning-based system, we find that fintech may increase gender discrimination. The rationale is that machine learning algorithms allow the platform to better decipher differences in borrower preferences between female and male borrowers. Specifically, after the switch, the platform assigned higher interest rates and better credit ratings to less price-sensitive female borrowers. These results are not driven by changes in borrower credit risk or lender preferences. Instead, the behavior is consistent with the platform’s attempt to maximize its revenue by applying price discrimination to female borrowers.

I develop a dynamic agency model to investigate optimal managerial authority and its interaction with managerial compensation. The model shows that when hiring a manager, the principal delegates authority that is unresponsive to either the manager's outside options or the firm's recruitment costs, in contrast to promised compensation, which increases in both. Over time, both the manager's authority and his compensation rise after good performances and decline after bad realizations. Authority-performance sensitivity decreases as the manager's authority grows, resembling entrenchment. In contrast, pay-performance sensitivity increases with the manager's authority. If managerial authority can be adjusted only infrequently, the optimal contract may allow for self-dealing. Moreover, the model reveals that early-career luck plays a disproportionate role in determining the manager's authority and lifetime utility.

Corporate bonds include action-limiting covenants that may prevent the firm from undertaking valuable growth opportunities ex-post but are virtually impossible to negotiate. We study the covenant defeasance option, which effectively mitigates this inefficiency by allowing the firm to remove the covenants. Our model predicts and our empirical analysis confirms that (1) financially constrained firms with high uncertainty are more likely to include this option; (2) with the defeasance option, issuers are willing to accept more action-limiting covenants ex-ante; and (3) investors require lower yield on non-callable bonds and a higher yield on standard callable bonds that are defeasible.

Will asset managers with large amounts of capital and high risk bearing capacity hold large blocks and monitor aggressively? Both block size and monitoring intensity are governed by the contractual incentives of institutional investors, which themselves are endogenous. We show that when high risk bearing capacity arises via optimal delegation, funds hold smaller blocks and monitor significantly less than proprietary investors with identical risk bearing capacity. This is because the optimal contract enables the separation of risk sharing and monitoring incentives. Our findings rationalize characteristics of real world asset managers and imply that block sizes will be a poor predictor of monitoring intensity.

Using detailed data on employees’ campaign contributions to Democrats and Republicans, we find that firms are considerably more likely to announce and complete a merger when their political attitudes are closer. Furthermore, acquisition announcement returns and post-merger performance are higher when employees have more similar political attitudes. The effects are stronger when political polarization is greater, during economic expansions, and when the target and acquirer plan to integrate operations. The effect of political attitudes is distinct from that of corporate culture. Overall, we provide new estimates that political attitudes and polarization affect the allocation of real assets in the economy.

We provide the first systematic evidence of contractual innovation in the terms of poison pill plans. In response to the increase in hedge fund activism, pills have changed to include anti-activist provisions, such as low trigger thresholds and acting-in-concert provisions. Using unique data on hedge fund views of SEC filings as a proxy for the threat of activists’ interventions, we show that hedge fund interest predicts pill adoptions. Moreover, the likelihood of a 13D filing declines after firms adopt “antiactivist” pills, suggesting that pills are effective in deterring activists. The results are particularly strong for “NOL” pills that, due to tax laws, have a five percent trigger. Our analysis has implications for understanding the modern dynamics of market discipline of managers in public corporations and evaluating policies that regulate defensive tactics.

This paper uses mergers and acquisitions (M&A) and textual analysis of firms' financial filings to show that competitive approach constitutes an important determinant of firms' investment decisions. The analysis reveals that becoming an acquirer or a target depends on the competitive approach. Moreover, M&A deals are more likely between companies implementing the same competitive approach. Those deals yield higher combined announcement returns, asset and sales growth. The same approach effect is stronger in a highly competitive environment and within an industry, suggesting that acquirer and target misalignment in competitive approaches constraints the optimal response to investment opportunities and market threats.

This paper studies the asset market for pollutive plants. Firms divest their most pollutive plants following environmental risk incidents. The buyers face weaker environmental pressures, and have supply chain relationships or joint ventures with the sellers. Following these divestitures, total and scaled pollution levels do not decline. The sellers earn higher returns when they sell more pollutive plants, and their ESG ratings increase while their regulatory compliance costs decrease after divesting. Overall, the asset market allows firms to redraw their boundaries in a manner perceived as environmentally friendly without real consequences for pollution levels and with substantial gains from trade.

We analyze jointly optimal carbon pricing and financial policies under financial constraints and endogenous climate-related transition and physical risks. The socially optimal emissions tax may be above or below a Pigouvian benchmark, depending on whether physical climate risks have a substantial impact on collateral values. We derive necessary conditions for emissions taxes alone to implement a constrained-efficient allocation, and show a cap-and-trade system or green subsidies may dominate emissions taxes because they can be designed to have a less adverse effect on financial constraints. Additionally introducing leverage regulation can be welfare-improving if environmental policies have a direct negative effect on financial constraints. Furthermore, our analysis highlights the positive effect of carbon price hedging markets on equilibrium environmental policies.

The control of carbon emissions by policymakers poses the new corporate challenge of developing an optimal carbon management policy. We provide a unified model that characterizes how firms should optimally manage emissions through production, green investment, and the trading of carbon credits, as well as the implications for asset prices. Under a carbon trading scheme, firms adopt precautionary policies such as under-producing compared to a laissez-faire benchmark. Perhaps surprisingly, firms with a large stock of credits are less committed to curbing emissions. Carbon regulation induces firms to tilt towards more immediate yet transient types of green investment as it becomes more costly to comply. Lastly, even if more polluting firms command a higher risk premium, carbon regulation need not reduce firm value.