Tax loss carryforwards (TLCF) — accumulated losses that reduce taxable income — are an important and risky corporate asset. We show theoretically how TLCF affect equity risk: If TLCF are low and used with certainty, equity risk decreases in TLCF because TLCF represent a safe cash flow; if TLCF are high, equity risk increases in TLCF because TLCF increase after-tax cash flows in good times but may expire unused or be deferred in bad times. In a calibrated model the latter effect dominates and risk increases in TLCF on average. Empirically, TLCF positively forecast firms’ volatility, beta, and return.
Are banks safer when they hold more safe assets? This paper builds a model in which banks supply liquidity services through uninsured deposits. Define a safe asset as an asset with both low payoff risk and high pledgeability. Banks consider equity costly and because of safe assets’ low payoff risk prefer to fund them largely with deposits. High pledgeability makes this feasible. The rise in banks’ deposit supply increases deposit rates and forces banks to deviate from socially desirable levels of capital to meet return-on-equity targets. Regulatory leverage ratios can be tightened to increase welfare.
Deviations from covered interest rate parity (CIP) are often linked to limits to arbitrage, yet trading volumes surge during periods of apparent no-arbitrage violations. We show that these distortions stem from constraints on non-U.S. agents’ access to wholesale U.S. dollar markets and reflect a premium for unencumbered synthetic dollar funding: non-U.S. banks substitute secured USD borrowing with FX swaps to meet regulatory requirements. A shadow cost-augmented CIP condition holds, implying no riskless arbitrage. U.S. dealers extract rents on dollar provision while non-U.S. customers bear $10.4 billion in additional annual hedging costs. Our results illustrate how intermediary constraints segment global dollar funding.
This paper quantifies how investors’ portfolio demand responds to price changes at long horizons versus short horizons. Using investor trades – changes in portfolios – at different horizons, I first present reduced-form evidence that elasticities increase significantly over time. I then propose a dynamic demand system via a parsimonious partial-adjustment model that recovers the full term structure of elasticities while mitigating long-horizon identification challenges. The estimates imply that price impacts are three times larger at quarterly horizons than in the long-run equilibrium. The model produces a novel, stock-level measure of long-term reversal that avoids the noise of long-horizon return regressions.
I document robust U.S. and international evidence that aggregate corporate cash savings negatively forecast future excess market returns, with economic uncertainty an important driver of this relation. In a calibrated neoclassical dynamic model featuring precautionary savings, I show that fixed financing costs, firm exit, and an uncertainty-driven time-varying price of risk are crucial to replicating this return predictability. The model further implies that the well-known positive return predictive power of aggregate accruals is largely attributable to aggregate cash savings, and the data support this implication.
Using close elections as an empirical setting, this paper examines the drivers and consequences of politically motivated lending by U.S. banks, with a special focus on resulting benefits. We first show that firms with ties to members of Congress receive more favorable loan terms, despite no observable improvements in performance or default risk. The effect is especially pronounced among banks facing regulatory challenges — such as FDIC enforcement actions, corporate misconduct investigations, or low Community Reinvestment Act ratings — which also lend more frequently to connected firms, suggesting that these institutions have a heightened demand for political influence. Crucially, we find that politically motivated lending produces tangible future benefits for banks, including reduced misconduct penalties and easier approval for mergers and acquisitions. These findings provide evidence of a quid pro quo dynamic: banks extend preferential credit to firms with political connections and, in turn, receive regulatory advantages.
A firm’s gross margin increases by 0.8 p.p.after forming a new direct board connection to a product market peer. Gross margin also rises by 0.4 p.p.after a connection is formed to a peer indirectly through a third intermediate firm. Further, using barcode-level data of 2.7 million products, we show that new board connections are related to higher consumer good prices, a greater tendency for market allocation, and slower new product introductions. The effects are stronger when the newly connected peers share corporate customers or have similar business descriptions and hold when controlling for other inter-firm relationships.
Exploiting transaction-level international trade data, this paper documents that long-term firm-to-firm relationships facilitate the use of trade credit, with the strength of this effect varying with firm size, firms’ payment delays, and multinational affiliate status. Effects also depend on the strength of contract enforcement across countries and the complexity of products traded. Because trade credit can reduce the overall need to borrow from the financial sector, long-term relationships may reduce firms’ credit demand. The destruction of trade relationships, for example, through trade conflicts, may hence increase firms’ leverage.
Using a new equilibrium representation, I characterize dynamic, nonstationary risk sharing in a complete-information setting among strategic traders submitting demand schedules and heterogeneous in risk aversion. In equilibrium, more risk-averse (smaller) traders diversify more aggressively due to endogenously lower price impact. This creates term structure effects, where smaller traders dynamically hedge the persistent order flow of larger, slower traders and become the marginal pricers at short horizons. When pre-announced security issuances (e.g., bond reopenings) or predictable trades take place, the model generates the gradual, V-shaped price response observed around these events and delivers new predictions about institutional trading.
How do bank networks facilitate information flows that shape market outcomes? Using international banks’ advisory activities in corporate takeovers as their source of private information, we show in supervisory data that banks with closer ties to the target, but not the acquirer, advisor trade profitably in the target’s stock prior to the deal announcement. This trading behavior is associated with a higher premium paid without compromising deal success. As connected banks’ incentives are aligned only with target shareholders’ interests, which are represented by the target advisor, our evidence suggests that economic incentives determine which banks share information and with whom.
As the economy has become increasingly knowledge-based, firms' capability to benefit from external knowledge has grown in importance. We construct a measure of this capability-absorption intensity-from information in firms' patents. To validate the measure, we exploit the American Inventors Protection Act (AIPA), which exogenously increased patent information availability. A triple-difference design shows that firms with higher absorption intensity experience greater innovation growth when more exposed to the reform. Beyond AIPA, absorption intensity predicts stronger innovation outcomes and firm growth. Our measure offers a tool to study how differences in absorption capability shape returns to external knowledge.
Utilizing leading machine learning techniques to analyze the textual content and quality of patents, we demonstrate that patents with female lead inventors are under-cited relative to what would be expected had the lead inventor been male. Male inventors are the greatest contributors to the undercitation of patents with female inventors, followed by female inventors and male examiners, while female patent examiners appear to be even-handed. Using market reactions to patents suggests no average difference in market value by the inventor’s gender. The results have potential implications for research conclusions that rely on citation-based assessments of patent quality.
We develop a general equilibrium model in which firms issue nearly redundant securities to investor clienteles with participation constraints, with prices and demand determined endogenously in primary and secondary markets. The model characterizes how issuance costs, market frictions, and investor composition shape firms’ funding choices, equilibrium prices, and asset allocations. We test the model’s predictions using data from the Malaysian corporate bond market following the introduction of Islamic bonds. Consistent with the model, issuance decisions reflect trade-offs between collateral and liquidity benefits, Islamic and conventional bonds coexist without crowding out, and the expanded investor base increases access to debt financing.
We document a global reallocation of pollutive assets as a response to investor pressure: large firms facing increased investor pressure divest foreign-located pollutive assets to firms that are less in the limelight. There is no evidence of increased engagement in any other emission reduction activities. We estimate that 369 million metric tons (mt) of CO2e are reallocated via divestments in the post-Paris Agreement period. Our results indicate that investor pressure to decarbonize reshapes the global conglomerate structure of large firms.
We test whether forecast bias affects individual investors’ stock trading by combining bias measures from laboratory experiments with administrative trade data. Forecast bias is positively associated with past excess returns of purchased stocks: Compared to contrarians, extrapolators purchase stocks with higher past returns. Forecast bias is negatively associated with capital gains of sold stocks. Forecast bias also explains investor heterogeneity in the relation between market returns and net flows. Taken together, forecast bias provides a unifying mechanism through which different salient performance measures — past stock returns, capital gains, and past market returns — shape corresponding purchase, sale, and net flow decisions.
We study the rationale behind firms’ investment in risky financial assets by formulating and estimating a dynamic model in which firms allocate their precautionary savings to both safe and risky securities. In equilibrium, risky financial asset holdings are positively related to the sensitivity of a firm’s financing deficit to the risky asset returns—the “financing deficit beta”. Using a comprehensive sample of US corporate financial asset holdings, we find evidence of a positive correlation between risky financial asset holdings and financing deficit betas that capture firms’ incentives to hedge interest-rate risk. Precautionary motives are stronger in small, high-volatility, and R&D-intensive firms.
We analyze 18 quadrillion models for the joint pricing of corporate bond and stock returns. Strikingly, we find that equity and nontradable factors alone suffice to explain corporate bond risk premia once their Treasury term structure risk is accounted for, rendering the extensive bond factor literature largely redundant for this purpose. While only a handful of factors, behavioral and nontradable, are likely robust sources of priced risk, the true latent stochastic discount factor is dense in the space of observable factors. Consequently, a Bayesian Model Averaging Stochastic Discount Factor explains risk premia better than all low-dimensional models, in- and out-of-sample, by optimally aggregating dozens of factors that serve as noisy proxies for common underlying risks, yielding an out-of-sample Sharpe ratio of 1.5 to 1.8. This SDF, as well as its conditional mean and volatility, are persistent, track the business cycle and times of heightened economic uncertainty, and predict future asset returns.
