We review the evidence on the impact of private equity (PE) ownership on firms, stakeholders, and the economy. We organize this literature using a framework that emphasizes the costs and benefits of PE as an ownership form and implies five main predictions: ( a ) Only some firms are natural PE targets, ( b ) PE ownership is optimally temporary, ( c ) debt is typically a cheaper source of capital than PE equity, ( d ) PE activity is strongly cyclical, and ( e ) the PE model is a second-best response to underlying agency and contracting frictions. We use this framework to interpret existing evidence and to clarify when, and for whom, PE ownership creates value.
This review examines how M&A reshape the creation, diffusion, and ownership of innovation. It treats M&A as one form of boundary choice over innovative assets and people, alongside licensing, alliances, corporate venture capital, minority stakes, inventor mobility, and acqui-hires. Synthesizing evidence from finance, industrial organization, strategy, and sector studies, the review explains why firm boundaries matter for knowledge flows; how innovation shapes who buys whom; and how acquisition markets affect inventive effort, start-up exits, and the build-versus-buy boundary. Post-M&A outcomes are heterogeneous because deals are selected matches and innovation has multiple margins: R&D effort, patenting, novelty, exploration, exploitation, commercialization, diffusion, and human capital reallocation. The review closes by linking property rights and labor market perspectives on inventors, teams, mobility, acqui-hiring, and labor market power and by outlining a policy-relevant agenda.
This article surveys evidence on the evolution of the capital share—the portion of output accruing to firm owners as after-tax profits—and its contribution to asset prices, arguing that capital share risk is a dominant driver of equity values. Using aggregate data on the US corporate sector, we show that the capital share has more than doubled since the late 1980s, driven primarily by a falling labor share. These changes have passed through nearly one-for-one into higher corporate payouts and help explain the long-run divergence between growth in the value of the stock market and real economic activity. Our review summarizes existing research on the measurement and structural consequences of movements in the capital share and outlines open questions about its empirical properties and endogenous links to macroeconomic variables. In sum, capital share risk is essential to understanding asset pricing dynamics in the modern economy.
This review examines the rapid expansion and convergence of retail betting markets. We analyze market design elements, discuss economic utility, and highlight shared behavioral drivers of sports betting markets, prediction markets, and retail options trading. Our review underscores how technological innovation, behavioral biases, and regulatory arbitrage have shaped recent market evolution. We highlight important considerations for policy makers facing a changing landscape and outline possibilities for further research.
What is collateral? What does it do? We set up a general model to illustrate the current thinking on these questions. The model captures classical ideas on how collateral improves bilateral enforcement by conveying rights of seizure that a creditor can exercise against a borrower. It also captures how collateral improves multilateral enforcement by conveying rights of exclusion that a creditor can exercise against other creditors, something we argue is especially useful to distinguish between secured and unsecured debt. The model sets the stage to analyze the restructuring of dispersed claims in and out of bankruptcy, which we describe in more specific models. The framework captures numerous empirical patterns even absent risk, dynamics, and asymmetric information. It thus suggests that those ingredients, while essential in applications, might not be fundamental to what collateral is and does.
Technology continues to change how investors participate and access financial markets. The switch from human-centered to electronic-based trading has been a decades-long process, with costs dropping at each stage. In this article, we explore how technology has shaped the market for retail investment. While retail investors have enjoyed dramatic decreases in costs, hurdles remain in specific markets. Technology has also changed the markets in which retail investors participate, which raises questions not only about the best regulation of these markets but also about the specific agency in charge of the regulation.
Blockchain-based trading venues, so-called decentralized exchanges, are at the heart of the decentralized finance revolution. Automated market makers, simple computer programs on the blockchain, administer liquidity and set the terms of trade. This article summarizes the key mechanisms behind these new markets, how they differ from traditional financial markets, how liquidity is provided, how prices are set, and how liquidity providers get compensated. We include a short guide on how to understand blockchain data and use these data for academic research.
Rising government intervention, corporate political spending, and geopolitical rifts underscore the importance of the link between politics and finance. This review describes how politics affects firms, banks, households, and markets. Companies form political ties through board connections, lobbying, revolving-door hires, and contributions. In return, they gain access to procurement contracts, cheaper debt, bailouts, policy information, and reduced enforcement. Political ties are generally associated with increased shareholder value but can also be costly during periods of political disruption. Political factors spill over to banking, where banks favor connected firms and secure regulatory forbearance; to households, whose partisan beliefs shape investments; to asset markets, which price political risk; and to global capital markets, where investment and banking flows respond to geopolitical risks. We conclude with open questions, including which types of money matter most in politics, how politics influences relational contracts, and how to integrate political economy factors into finance theory.
The explosive growth of private credit over the past 15 years has attracted the attention of an increasing number of policy makers and academic researchers. This article provides an overview of the large-sample research to date, structured around three core themes: the distinct economic function of private credit, the macroeconomic implications of the expansion of private debt, and the evaluation of private debt as an asset class. It highlights areas where there is convincing evidence, such as the overall exposure of the banking sector to private credit, and outlines several other areas where the evidence remains limited, such as the interplay between monetary policy and private credit and the evolution of underwriting standards. Finally, the article situates the evolution of high-yield debt markets, including private credit, within a historical context, highlighting their fundamental connection to the evolution of the private equity industry.
Bank failures can stem from runs on otherwise solvent banks or from losses that render banks insolvent, regardless of withdrawals. Disentangling the relative importance of liquidity and solvency in explaining bank failures is central to understanding financial crises and designing effective financial stability policies. This paper reviews evidence on the causes of bank failures. Bank failures—both with and without runs—are almost always related to poor fundamentals. Low recovery rates in failure suggest that most failed banks that experienced runs were likely fundamentally insolvent. Examiners’ postmortem assessments also emphasize the primacy of poor asset quality and solvency problems. Before deposit insurance, runs commonly triggered the failure of insolvent banks. However, runs rarely caused the failure of strong banks, as such runs were typically resolved through other mechanisms, including interbank cooperation, equity injections, public signals of strength, or suspension of convertibility. We discuss the policy implications of these findings and outline directions for future research.
Growing evidence points to declining competition across industries in the United States, including the financial sector. Such findings have reinvigorated research efforts to understand the ramifications of rising market power for financial markets. In this article, we survey some of these efforts by reviewing the evidence and outlining a simple model structure that we find useful in organizing and examining links between trends in the competitive environment and financial markets. The framework is highly tractable and endogenously links market concentration, markups, and demand elasticities. Indeed, we think that the structure could serve as a building block in models that can help rationalize and connect some of the empirical evidence we review, as well as flesh out further implications in future research.
Safe and liquid assets (convenience assets) are used to make payments, meet unexpected consumption shocks, and facilitate financial transactions. The value of these convenience services is captured by the convenience yield, which is determined by the aggregate demand and supply of convenience assets. US Treasury securities are a prime example of a convenience asset, while bank and nonbank financial institutions also produce claims with varying degrees of safety and liquidity. Repos are safe and liquid securities created from tranching a long-term bond into a risky equity claim and a debt repo claim. Banks and bond mutual funds create liquid assets by pooling across investors’ idiosyncratic liquidity risk. Finally, packaging securities into a composite, as in mortgage-backed securities, also creates liquid and safe assets. Private sector creation of convenience assets involves a number of challenges, including leverage constraints and panic runs. We discuss how to measure convenience yields, convenience asset creation by the private sector, and the equilibrium determination of convenience yields.
We survey and extend work on the Federal Reserve’s effect on the stock market, focusing on three empirical findings: The effect of monetary policy surprises in a narrow window around announcements from the Federal Open Market Committee (FOMC), the pre-FOMC announcement drift, and the FOMC cycle in stock returns. We discuss the magnitude of the Fed’s impact (directional effects or effects on average stock returns), the types of shocks coming from the Fed (pure monetary policy shocks, reaction function news, or information about the Fed’s view of the economy), and the asset pricing channels through which effects emerge (an equity premia for news from the Fed, or changes to yields, equity premia, or expected dividends). We also consider the information transmission (communication) channels. The Fed’s effect on the stock market is large, even for average stock returns earned over periods of several decades. Fed-induced changes to both yields and equity premia play substantial roles, with less direct evidence available regarding cash flows. For stocks, reaction function news appears to be more important than Fed information effects. Communication flows outside announcements windows are important.
This article examines the evolution and challenges of model-based capital regulation in banking, discussing its impact on banking system resilience and financial stability. Introduced with Basel II, model-based regulation sought to link capital requirements to asset risk but encountered practical issues like discretion in banks’ risk reporting, complexity, and procyclicality, weakening its effectiveness. Large banks often exploited modeling discretion to reduce capital requirements, lowering equity levels and amplifying systemic risk, as evidenced in the global financial crisis of 2008. While greater distance between banks and supervisors limits discretion, the findings underscore the advantages of simpler frameworks, such as leverage ratios, for enhancing transparency and stability. Political economy considerations, however, complicate international regulatory alignment, as national regulators balance stability objectives with considerations about domestic competitiveness. The article concludes that streamlined regulation paired with strong and robust equity standards would bolster financial stability and calls for further research on regulatory frameworks and systemic risk.
Making payments in an efficient manner is critical to a well-functioning economic system. While the direct effect of reducing the cost of payments is an increase in user welfare, changes in the payment system can have broader economic effects. This is because payment systems are characterized by a multisided network externality, as the willingness of consumers to participate in a payment method depends on the number of merchants on the system and operators of a payment system can glean information from the payment flows. We highlight the role that banks have played in the payment system and show how payment innovation can lead to bank disintermediation both in payment services and in the credit market. We highlight some recent innovations in payments—some of these rely on the banking system and others try to bypass it. There are many interesting open questions for researchers to explore in this field.
This article examines US Treasury securities market functioning from the global financial crisis through the COVID-19 pandemic given the ensuing market developments and associated policy responses. We describe the factors that have affected intermediaries, including regulatory changes, shifts in ownership patterns, and increased electronic trading. We also discuss their implications for market functioning in both normal times and times of stress. We find that alternative liquidity providers have stepped in as constraints on dealer liquidity provision have tightened, supporting liquidity during normal times, but with less clear effects at times of stress. We conclude with a brief discussion of more recent policy initiatives that are intended to promote market resilience.
In financial crises, a period of overheated credit markets turns into a credit crunch accompanied by a systemic breakdown in the financial intermediary sector. Without a deep understanding of their roots, designing policies to decrease the probability of suffering from them or to avoid the worst consequences is like flying blind. In this review, I survey the recent development of the theory of financial crises. I focus on the answers these theories provide to four fundamental questions. What makes the booming phase fragile, and what are the incentives and frictions leading to that fragility? What triggers the crisis? Why is the downturn persistent? Should policy intervene, and if so, how?
This review article highlights what we know from neuroeconomics regarding the effects of context, past experiences, and age on brain processes involved in decision-making and illustrates how finance research has built on these insights, and how it could continue to do so going forward.
This article provides an overview of the regulation of market microstructure, particularly in equity and option markets. We emphasize the motives for regulation and restrictions on the trading process, including the distinctive regulatory environments (and regulators) for different financial instruments as well as the role of brokers in routing trades, and market makers who intermediate trade. Our article highlights such central features of the design of markets as best execution responsibilities; order protection (trade-through) restrictions (Regulation NMS); payment for order flow, tick size, and access fees; and the role of auctions, transparency, and short-selling restrictions. We point to some of the distinctive features of fixed-income trading and market design and the emerging role of litigation in determining regulatory outcomes.
