Regulating Over‐the‐Counter Markets
Version of Record online: 5/30/2025 | DOI: 10.1111/jofi.13461
TOMY LEE, CHAOJUN WANG
Over‐the‐counter (OTC) trading thrives despite competition from exchanges. We let OTC dealers cream skim from exchanges in an otherwise standard Glosten and Milgrom framework. Restricting the dealer's ability to cream skim induces “cheap substitution”: some traders exit while others with larger gains from trade enter. Cheap substitution implies trading costs, trade volumes, and market shares are poor policy indicators. In a benchmark case, restricting the dealer raises welfare only if trading cost increases, volume falls, and OTC market share is high. By contrast, the restriction improves welfare when adverse selection risk is low. A simple procedure implements the optimal Pigouvian tax.
What Is the Cost of Privatization for Workers?
Version of Record online: 5/30/2025 | DOI: 10.1111/jofi.13462
MARTIN OLSSON, JOACIM TÅG
Privatization of state‐owned enterprises is on the agenda across the globe. Using Swedish data covering two decades, we show that productivity gains and headcount reductions are associated with economic costs for incumbent workers. Workers experience income losses and higher unemployment, but half of the losses are covered by the social safety net. We also find small positive effects on entrepreneurship and cash holdings but no meaningful effects on other labor market, family, health, or household finance outcomes. Productivity improves when the CEO is replaced, and the gains outweigh workers' income declines by a factor of between two and six.
The Term Structure of Interest Rates in a Heterogeneous Monetary Union
Version of Record online: 5/28/2025 | DOI: 10.1111/jofi.13463
JAMES COSTAIN, GALO NUÑO, CARLOS THOMAS
We build an arbitrage‐based model of the yield curves in a heterogeneous monetary union with sovereign default risk, which accounts for the asymmetric shifts in euro‐area yields during the Covid‐19 pandemic. We derive an affine term structure solution, and decompose yields into expectations, term premium, expected default loss, and credit risk premium components. In an extension, we endogenize the peripheral default probability, showing that it decreases with central bank bond holdings. Calibrating the model to Germany and Italy, we show that both the level and the shifts in the sovereign spread are mainly attributable to the credit risk premium.
Version of Record online: 5/28/2025 | DOI: 10.1111/jofi.13465
THOMAS FLANAGAN
Using a novel data set of realized syndicated loan cash flows and a risk‐adjustment methodology adapted from the private equity literature, I provide a measure of risk‐adjusted returns for bank loan cash flows. Banks, on average, generate 180 basis points in gross risk‐adjusted returns and add $75 million of value annually to their loan portfolios. Banks earn higher returns when they lend to financially constrained borrowers, and the risk‐adjusted performance of bank loan portfolios exhibits persistence. However, banks require higher risk‐adjusted returns when facing their own financing frictions, and shareholders earn nearly zero net risk‐adjusted returns once bank staff are compensated for their lending effort. Overall, these findings suggest that banks provide valuable services to mitigate borrowers' financing frictions, and the present value of loan cash flows pays for the costs of providing these services.
Interlocking Directorates and Competition in Banking
Version of Record online: 5/27/2025 | DOI: 10.1111/jofi.13464
GUGLIELMO BARONE, FABIANO SCHIVARDI, ENRICO SETTE
We study the effects on corporate loan rates of an unexpected change in the Italian legislation that forbade interlocking directorates between banks. Exploiting multiple firm‐bank relationships to fully account for all unobserved heterogeneity, we find that prohibiting interlocks decreased the interest rates of previously interlocked banks by 14 basis points relative to other banks. The effect is stronger for high‐quality firms and for loans extended by interlocked banks with a large joint market share. Interest rates on loans from previously interlocked banks become more dispersed. Finally, firms borrowing more from previously interlocked banks expand investment, employment, and sales.
Would Order‐By‐Order Auctions Be Competitive?
Version of Record online: 5/13/2025 | DOI: 10.1111/jofi.13449
THOMAS ERNST, CHESTER SPATT, JIAN SUN
We model two methods of executing segregated retail orders: brokers' routing, whereby brokers allocate orders using the market maker's overall performance, and order‐by‐order auctions, where market makers bid on individual orders, a recent U.S. Securities and Exchange Commission proposal. Order‐by‐order auctions improve allocative efficiency, but face a winner's curse reducing retail investor welfare, particularly when liquidity is limited. Additional market participants competing for retail orders fail to improve total efficiency and investor welfare when entrants possess information superior to incumbent wholesalers. Our results hold when new entrants are less informed or the information structure differs. We also examine the cross‐subsidization of brokers' routing.
Women in Charge: Evidence from Hospitals
Version of Record online: 4/26/2025 | DOI: 10.1111/jofi.13455
KATHARINA LEWELLEN
The paper examines the decision‐making, compensation, and turnover of female CEOs in U.S. hospitals. Contrary to the literature on lower‐ranked executives and directors in public firms, there is no evidence that gender differences in preferences for risk or altruism affect decision‐making of hospital CEOs: corporate policies do not shift when women take (or leave) office, and male and female CEOs respond similarly to a major financial shock. However, female CEOs earn lower salaries, face flatter pay‐for‐performance incentives, and exhibit greater turnover after poor performance. Hospital boards behave as though they perceive female CEOs as less productive.
Dynamic Banking and the Value of Deposits
Version of Record online: 4/23/2025 | DOI: 10.1111/jofi.13454
PATRICK BOLTON, YE LI, NENG WANG, JINQIANG YANG
We propose a theory of banking in which banks cannot perfectly control deposit flows. Facing uninsurable loan and deposit shocks, banks dynamically manage lending, wholesale funding, deposits, and equity. Deposits create value by lowering funding costs. However, when the bank is undercapitalized and at risk of breaching leverage requirements, the marginal value of deposits can turn negative as deposit inflows, by raising leverage, increase the likelihood of costly equity issuance. Banks' inability to fully control leverage distinguishes them from nondepository intermediaries. Our model suggests a reevaluation of leverage regulations and offers new perspectives on banking in a low‐interest‐rate environment.
Is the United States a Lucky Survivor? A Hierarchical Bayesian Approach
Version of Record online: 4/16/2025 | DOI: 10.1111/jofi.13452
JULES VAN BINSBERGEN, SOPHIA HUA, JONAS PEETERS, JESSICA WACHTER
Using international data, we quantify the magnitude of survivorship bias in U.S. equity market performance, finding that it explains about one‐third of the equity risk premium in the past century. We model the subjective crash belief of an investor who infers the crash risk in the United States by cross‐learning from other countries. The U.S. crash probability shows a persistent and widening divergence from the implied global average. We attribute the upward bias in the measured equity premium to crashes that did not occur in‐sample and to shocks to valuations resulting from learning about the probability.
Are CEOs Rewarded for Luck? Evidence from Corporate Tax Windfalls
Version of Record online: 4/9/2025 | DOI: 10.1111/jofi.13448
MARTINA ANDREANI, ATIF ELLAHIE, LAKSHMANAN SHIVAKUMAR
Venture Capital and Startup Agglomeration
Version of Record online: 4//2025 | DOI: 10.1111/jofi.13451
JUN CHEN, MICHAEL EWENS
This paper examines venture capital's (VC) role in the geographic clustering of high‐growth startups. We exploit a rule change that disproportionately impacted U.S. regions that historically lacked VC financing via a restriction of banks to invest in the asset class. A one‐standard‐deviation increase in VCs' exposure to the rule led to a 20% decline in fund size and a 10% decrease in the likelihood of raising a follow‐on fund. Startups were not wholly cushioned: financing and valuations declined. Startups also moved out of impacted states after the rule change, likely exacerbating existing geographic disparity in entrepreneurship.
Creating Controversy in Proxy Voting Advice
Version of Record online: 3/16/2025 | DOI: 10.1111/jofi.13438
ANDREY MALENKO, NADYA MALENKO, CHESTER SPATT
We analyze how a profit‐maximizing proxy advisor designs vote recommendations and research reports. The advisor benefits from producing informative, unbiased reports, but only partially informative recommendations, biased against the a priori likely alternative. Such recommendations induce close votes, increasing controversy and thereby the relevance and value of proxy advice. Our results suggest shifting from an exclusive emphasis on recommendations, highlighting the importance of both reports and recommendations in proxy advisors' information provision. They rationalize the one‐size‐fits‐all approach and help reinterpret empirical patterns of voting behavior, suggesting that proxy advisors' recommendations may not be a suitable benchmark for evaluating shareholders' votes.