We develop a model of a firm with a production project that may cause environmental pollution. The firm can borrow funds to pay for pollution abatement but faces an underinvestment problem due to debt overhang. We investigate how the interaction of public regulatory enforcement and private loan contracting works towards ensuring environmental compliance. To force the firm to internalize the externality, there is a minimum required level of public enforcement, which is increasing with the size of the pollution. When this minimum requirement is met, the firm effectively complements the public effort with private based oversight in its loan contracting.
We examine the impact of institutional monitoring on capital markets in an asset class with inherently low opportunity for agency risk. Despite the REIT industry's transparency, insufficient institutional oversight can produce adverse market outcomes. To capture shareholder distraction, we adapt the Kempf et al. (2017) measure to REITs, exploiting attention-grabbing shocks to non-REIT firms in institutional portfolios. We show that institutional investor distraction leads to higher levels of information asymmetry. In equity markets, we see more frequent stock price crashes and other negative tail events for firms lacking institutional investor attention. In corporate debt markets, these firms have higher credit spreads and lower credit ratings. Our results provide evidence that even a highly transparent sector with low agency risk is not immune to agency conflicts when institutional monitoring is scarce.
We examine and compare the return predictability of mood-, word-, and trade-based sentiment measures across 18 international stock markets. Empirical results reveal that the trade-based measure performs strongly across many settings; the word-based measure contributes important complementary information, including in cases where the trade-based measure is less informative; and the mood-based measure provides useful signals at shorter horizons and in certain markets. Overall, no single measure dominates universally, and our findings highlight the significance of contextual factors such as test types, forecast horizons, and stock markets in determining the predictive efficacy of sentiment measures.
Firms may prefer to delay some loan payments while continuing to service others because of lender and loan characteristics. I explore the impact of bank-level and bank-firm-level indicators on the strategic delay behaviors of nonfinancial corporations. Three factors play a key role in their strategic delay decisions. First, strategic delay events occur more when the likelihood of obtaining additional and high-quality funding in the future is limited. Second, firms are more reluctant to delay payments of loans strategically that are easier to repay. Third, firms are more likely to delay payments when the anticipated cost of delaying is low. Importantly, as the financial literacy levels of firm owners increase, the likelihood of a strategic delay event decreases.
We examine the effect of economic policy uncertainty (EPU) on the corporate lease decision using an international sample of 19 countries. The use of operating leases increases when EPU is heightened. The documented leasing increase is more pronounced for financially constrained firms, firms facing greater operating volatility, or those that have higher investment irreversibility. In contrast, the use of leasing in times of high EPU is mitigated when a country is unlikely to enforce the contracts or the country's credit markets dampen the demand for leasing. Collectively, the evidence supports theoretical arguments that leased assets are a more flexible form of investment than purchased assets.
Using a large sample of Chinese firms, we show that tunneling is associated with significantly lower employee compensation and that employee power and awareness mitigate this relation. We also find that, as expected, when the CEO is also the chair of the board, the connection is stronger, suggesting that in this case, employees are more likely to be paid less when tunneling occurs. This is also the case when the CEO holds shares in the company. We also find that state-owned enterprises (SOEs) tend to mitigate the relation between tunneling and employee pay. Combined, this suggests that a lack of governance aids the relation. Finally, when we investigate which wage components are affected by tunneling, we find that all but one component (i.e., insurance) are negatively related to tunneling.
This article studies how expected inflation risk affects asset prices. We propose an ex-ante, tradable proxy for this risk, derived from the term spread of gold futures prices. Using cross-sectional and time series asset pricing tests, we show how an increase in expected inflation risk lowers contemporaneous prices and raises equity returns. We find that our proxy has a positive impact on firms that have more pricing power.
This article examines the impact of mobile internet usage on stock price crash risk using Chinese listed firms from 2014 to 2022. We find that a 1 GB per user increase in mobile internet usage reduces firm-specific crash risk by 0.59%. Instrumental variable regressions and a difference-in-differences method exploiting 4 G rollout programs confirm causality. The effect operates through three main channels: increased investor attention, greater retail investor activism, and enhanced market liquidity. The effect is more pronounced among firms with weaker corporate governance. Overall, these findings highlight the beneficial role of mobile internet in reducing crash risk.
We examine whether liquidity factors add priced information beyond the Fama-French factors, especially size (SMB). Using U.S. equities from 1963-2023, we construct six liquidity factors tied to liquidity costs and liquidity-risk exposures. Three factors-liquidity costs (LIQ), liquidity commonality (COM), and liquidity sensitivity to market uncertainty (LMU)-capture distinct, economically meaningful liquidity risk. Although highly correlated with SMB, these factors improve spanning and performance tests and leave significant residual pricing information relative to standard models. Liquidity therefore complements the Fama-French framework and highlights additional channels through which trading frictions and uncertainty shape expected returns.
We examine institutional investors' herding behavior around credit rating changes. We find that institutions herd into stocks with recent rating upgrades and herd out of stocks with recent downgrades, with a stronger effect for rating downgrades, large rating changes, and high-risk firms. These results remain after controlling for earnings surprises and analysts' recommendation revisions. Results from price impact tests and cross-sectional analyses by firm- and institution-type suggest that the institutional herding following credit rating changes is mainly an overreaction to rating downgrades and is more consistent with reputational herding.
This study examines how the thematic content of Environmental, Social, and Governance (ESG) reports relates to information asymmetry in capital markets. Analyzing 7,565 ESG reports from 1,715 U.S. firms between 1998 and 2023 using sentence-level topic modeling (sentLDA), we identify 30 distinct disclosure topics. Using the dispersion in analysts' forecasts as a proxy for information asymmetry, the results indicate that environmental themes are associated with lower levels of analyst disagreement, social topics with higher disagreement, while governance-related themes show limited association. These findings highlight that the informativeness of ESG reports depends not only on whether firms choose to disclose ESG information, but also on what they choose to disclose. In addition, we find that first-time reports are more informative than subsequent ones and that topic diversity exhibits a concave relationship with informativeness, suggesting diminishing returns from a broader thematic coverage. Finally, we find that ESG reports' informativeness is greater when analyst coverage is greater, institutional ownership is lower, ESG performance is higher, and third-party ESG ratings show greater convergence.
We examine how categorical economic policy uncertainty (EPU) is linked to extreme downside risk in U.S. energy futures markets across contract maturities. Using data from 1994 to 2024, we document maturity-dependent spillovers between EPU indices and Value-at-Risk (VaR) for crude oil and natural gas. Crude oil VaR exhibits increasing connectedness with maturity, while natural gas shows a flatter pattern. The composition of policy-driven spillovers also varies across maturities and time. Storage capacity constraints, which may hinder carry arbitrage, intensify spillovers to longer-term contracts, especially in the oil market. This highlights the role of physical market friction in policy risk transmission.
We examine short selling activity in leveraged Exchange-Traded Funds (ETFs) and its impact on underlying index performance. Using a novel measure of ETF short exposure, which includes long positions in inverse leveraged ETFs, we document that high short exposure is associated with positive performance in the subsequent period. While the short exposure of both 1X and leveraged ETFs predicts future returns, the latter is more pronounced. This predictability is particularly significant during periods of economic downturns and is primarily driven by inverse leveraged ETFs. Our findings highlight the critical role of leveraged ETFs in hedging strategies and suggest that monitoring short exposure in broad market ETFs provides valuable insights for investors during volatile times.
We study how corporate governance moderates the relationship between corporate social responsibility (CSR), corporate social irresponsibility (CSI), and firm risk. We find that CSR reduces risk for firms with strong governance. In contrast, CSI increases firm risk more significantly for firms with stronger governance, suggesting that backlash is more severe when well-governed firms engage in irresponsible behavior. Overall, our evidence indicates that the negative impact of CSI for well-governed firms outweighs the risk-reducing benefits of CSR. These findings provide strong support for information intensity arguments.
I analyze differences between the core and extended trading sessions in the high-frequency reaction of equity markets to potential news. Using presidential tweets as unanticipated, potentially market-stirring events, I find that volatility increases and liquidity deteriorates within fractions of a second after a tweet. The speed of quote adjustments indicates that algorithmic traders monitor social media sources around the clock and automatically trade upon this information. Compared to the core trading session, the reduction in market quality is much stronger and faster during the extended trading hours, when liquidity is lower and designated market maker participation is optional.
We explore the impact of country culture of individualism and uncertainty avoidance on the development of shadow banking throughout the world. We find that countries with high individualism and low uncertainty avoidance have higher shadow banking activities. Our results are robust to alternative and time-varying culture measures, alternative measures for shadow banking, different model specifications and endogeneity concerns. In addition, level of democracy in a country has a significantly positive moderating role in determining the relation between individualism and shadow banking.
This article examines how salient sustainability risks from near-miss natural disasters influence board composition. Using a difference-in-differences design, I find that firms located in counties neighboring disaster-affected areas significantly increase the presence of directors with sustainability expertise following the disaster. The effect is stronger for firms with greater institutional ownership and responsible investor ownership, suggesting that these governance changes are driven by investor expectations and preferences. Further analysis shows that these board changes are not short-lived, do not crowd out directors with other qualifications, and contribute to improvements in sustainability performance and firm value. Collectively, these findings highlight risk salience as a catalyst for strategic board restructuring.
We examine whether insiders can exploit public information to increase their trading profitability. By exploiting, as a quasi-natural experiment, the Bipartisan Infrastructure Law (BIL), announced in the U.S. in March 2021 and implemented in November 2021, we provide evidence that insiders earn higher profits when government investment plans are announced. The increased insider trading profitability is more pronounced in firms with high information asymmetry, high growth, in opportunistic trades, as well as for top executives and persistently profitable insiders. Overall, our evidence supports the attentive hypothesis that insiders earn profits by trading on public information relevant to their firms.
The increasing prevalence of institutional cross-holdings corresponds with the importance of common ownership in today's concentrated financial markets. This study investigates the influence of common ownership on executive pay duration. We find that common owners use long-duration pay as a mechanism to mitigate managerial myopia, which is the tendency to prioritize short-term gains over long-term value. Using a host of identification strategies, including indexer/non-indexer splits, blockholder fixed effects, and a quasi-natural experiment involving financial institution mergers, we show that endogenous factors are not likely to drive our conclusions or inferences. The relation between common ownership and pay duration is stronger in firms with characteristics conducive to myopia, such as high liquidity, information asymmetry, and strong non-compete agreement enforceability. Our results suggest that common owners use longer incentive horizons to align managerial actions with long-term firm performance, reducing stock price crash risk and enhancing sustainable value creation.
In its massive purchases of corporate bonds during the COVID-19 pandemic, the Bank of Japan set the maximum eligible remaining maturity at 5 years. I document that during the postpandemic period, Japanese firms increased bond issuance, with the increase concentrated in (1) issuance of bonds with eligible maturities (1-5 years) and (2) simultaneous issuance that combines eligible and longer, ineligible (>5-year) maturities. These results are consistent with central bank purchases promoting bond issuance via a demand channel-in contrast to the US experience under the Federal Reserve's facilities targeting similar-maturity corporate bonds-and with firms mitigating future rollover risk.
