ABSTRACT How do recent advances in Generative Artificial Intelligence (AI) affect firm value? We construct the first measure of firms' workforce exposures to Generative AI and show that an “Artificial‐Minus‐Human” portfolio earned 5% in the two weeks following the release of ChatGPT. The labor‐exposure effect is more pronounced for firms with greater data assets and is distinct from the effect of firms' product exposures to AI. We assess whether exposed workforces are substituted or complemented by Generative AI based on whether their exposed tasks are core or supplemental. Examining firms' labor demand and profitability following the release of ChatGPT supports a labor‐technology substitution channel.
ABSTRACT Firms tend to compete more aggressively when facing financial distress. This intensified competition reduces profit margins, pushing them further into distress and adversely affecting their industry peers. To study such feedback and contagion effects, we incorporate strategic competition in a dynamic model with long‐term defaultable debt, exploring various peer interactions such as predation and price wars. The feedback effect represents a novel source of financial distress costs associated with leverage, which helps explain the negative profitability‐leverage relation across industries. Owing to the contagion effect, firms' optimal leverage is often excessively high from an industry perspective, undermining the industry's financial stability.
ABSTRACT We show that bonds issued by financial firms have higher spreads than bonds issued by industrial firms with the same rating and maturity, a difference that we refer to as the financial premium. Over the period 1987 to 2020, in the United States, this premium is 43 basis points on average, with the premium higher for lower ratings, higher during financial crises, and increasing in bond beta. We derive a model that explains the financial premium: banks hold diversified portfolios of nonfinancial debt, and bank debt therefore reflects more systematic risk than nonfinancial debt.
ABSTRACT I show that the recent returns to environmental, social, and governance (ESG) investing are strongly driven by price impact from flows toward ESG portfolios. Using data on trades, I estimate the market's ability to accommodate ESG flows, which is given by the elasticity of substitution between ESG and other stocks. I show that every dollar flowing toward a representative ESG portfolio increases the market value of ESG stocks by $0.8. The growing institutional flows into the ESG portfolio are the main driver of ESG returns and have caused an annual flow‐driven return of 1.9%. In the absence of flows, ESG stocks would not have outperformed the market from 2012 to 2023.
ABSTRACT We document that the convenience yield of U.S. Treasuries exhibits properties consistent with a hedging perspective of safe assets, that is, Treasuries are valued highly if they appreciate with poor aggregate shocks. In particular, the convenience yield tends to be low when the covariance of Treasury returns with the aggregate stock market returns is high. A decomposition of the aggregate stock‐bond covariance into terms corresponding to the convenience yield, the frictionless risk‐free rate, and default risk reveals that the covariance between stock returns and the convenience yield itself drives the effect in a substantive capacity.
