The Limits of Limited Liability: Evidence from Industrial Pollution
Pages: 5-55 | Published: 10/2020 | DOI: 10.1111/jofi.12978 | Cited by: 141
PAT AKEY, IAN APPEL
We study how parent liability for subsidiaries' environmental cleanup costs affects industrial pollution and production. Our empirical setting exploits a Supreme Court decision that strengthened parent limited liability protection for some subsidiaries. Using a difference‐in‐differences framework, we find that stronger liability protection for parents leads to a 5% to 9% increase in toxic emissions by subsidiaries. Evidence suggests the increase in pollution is driven by lower investment in abatement technologies rather than increased production. Cross‐sectional tests suggest convexities associated with insolvency and executive compensation drive heterogeneous effects. Overall, our findings highlight the moral hazard problem associated with limited liability.
Pages: 57-111 | Published: 10/2020 | DOI: 10.1111/jofi.12976 | Cited by: 51
SHAI BERNSTEIN, TIMOTHY MCQUADE, RICHARD R. TOWNSEND
We investigate how the deterioration of household balance sheets affects worker productivity, and in turn economic downturns. Specifically, we compare the output of innovative workers who experienced differential declines in housing wealth during the financial crisis but were employed at the same firm and lived in the same metropolitan area. We find that, following a negative wealth shock, innovative workers become less productive and generate lower economic value for their firms. The reduction in innovative output is not driven by workers switching to less innovative firms or positions. These effects are more pronounced among workers at greater risk of financial distress.
Mortgage Design in an Equilibrium Model of the Housing Market
Pages: 113-168 | Published: 8/2020 | DOI: 10.1111/jofi.12963 | Cited by: 53
ADAM M. GUREN, ARVIND KRISHNAMURTHY, TIMOTHY J. MCQUADE
How can mortgages be redesigned to reduce macrovolatility and default? We address this question using a quantitative equilibrium life‐cycle model. Designs with countercyclical payments outperform fixed payments. Among those, designs that front‐load payment reductions in recessions outperform those that spread relief over the full term. Front‐loading alleviates liquidity constraints when they bind most, reducing default and stimulating housing demand. To illustrate, a fixed‐rate mortgage (FRM) with an option to convert to adjustable‐rate mortgage, which front‐loads payment reductions relative to an FRM with an option to refinance underwater, reduces price and consumption declines six times as much and default three times as much.
The Capitalization of Consumer Financing into Durable Goods Prices
Pages: 169-210 | Published: 10/2020 | DOI: 10.1111/jofi.12977 | Cited by: 13
BRONSON ARGYLE, TAYLOR NADAULD, CHRISTOPHER PALMER, RYAN PRATT
Using loan‐level data on millions of used‐car transactions across hundreds of lenders, we study the consumer response to exogenous variation in credit terms. Borrowers offered shorter maturity decrease expenditures enough to offset 60% to 90% of the monthly payment increase. Most of this is driven by shifting toward lower‐quality cars, but affected borrowers offset 20% to 30% of a monthly payment shock by negotiating lower prices for equivalent cars. Our results suggest that durable goods prices adjust to reflect credit terms even at the individual level, with one year of additional loan maturity increasing a car's price by 2.8%.
Inalienable Customer Capital, Corporate Liquidity, and Stock Returns
Pages: 211-265 | Published: 7/2020 | DOI: 10.1111/jofi.12960 | Cited by: 51
WINSTON WEI DOU, YAN JI, DAVID REIBSTEIN, WEI WU
We develop a model in which customer capital depends on key talents' contribution and pure brand recognition. Customer capital guarantees stable demand but is fragile to financial constraints risk if retained mainly by talents, who tend to quit financially constrained firms, damaging customer capital. Using a proprietary, granular brand‐perception survey, we construct a firm‐level measure of the inalienability of customer capital (ICC) that captures the degree to which customer capital depends on talents. Firms with higher ICC have higher average returns, higher talent turnover, and more precautionary financial policies. The ICC‐sorted long‐short portfolio's spread comoves with financial constraints factor.
A Dynamic Model of Optimal Creditor Dispersion
Pages: 267-316 | Published: 10/2020 | DOI: 10.1111/jofi.12974 | Cited by: 9
HONGDA ZHONG
Borrowing from multiple creditors exposes firms to rollover risk due to coordination problems among creditors, but it also improves firms' repayment incentives, thereby increasing pledgeability. Based on this trade‐off, I develop a dynamic debt rollover model to analyze the evolution of creditor dispersion. Consistent with empirical evidence, I find that firms optimally increase creditor dispersion after poor performance. In contrast, cross‐sectionally higher‐growth firms can support more dispersed creditors. Frequent debt renegotiation limits firms' ability to increase pledgeability by having more creditors. Finally, holding a cash balance while borrowing from multiple creditors improves firms' repayment incentives uniformly across all future states.
A Unified Model of Firm Dynamics with Limited Commitment and Assortative Matching
Pages: 317-356 | Published: 10/2020 | DOI: 10.1111/jofi.12980 | Cited by: 9
HENGJIE AI, DANA KIKU, RUI LI, JINCHENG TONG
We develop a unified theory of dynamic contracting and assortative matching to explain firm dynamics. In our model, neither firms nor managers can commit to arrangements that yield lower payoffs than their outside options, which are microfounded by the equilibrium conditions in a matching market. The model endogenously generates power laws in firm size and CEO compensation, and explains differences in their right tails. We also show that our model quantitatively accounts for many salient features of the time‐series dynamics and the cross‐sectional distribution of firm investment, dividend payout, and CEO compensation.
Information Consumption and Asset Pricing
Pages: 357-394 | Published: 10/2020 | DOI: 10.1111/jofi.12975 | Cited by: 66
AZI BEN‐REPHAEL, BRUCE I. CARLIN, ZHI DA, RYAN D. ISRAELSEN
We study whether firm and macroeconomic announcements that convey systematic information generate a return premium for firms that experience information spillovers. We use information consumption to proxy for investor learning during these announcements and construct ex ante measures of expected information consumption (EIC) to calibrate whether learning is priced. On days when there are information spillovers, affected stocks earn a significant return premium (5% annualized) and the capital asset pricing model performs better. The positive effect of the Federal Reserve Open Market Committee announcements on the risk premia of individual stocks appears to be modulated by EIC. Our findings are most consistent with a risk‐based explanation.
Learning From Disagreement in the U.S. Treasury Bond Market
Pages: 395-441 | Published: 8/2020 | DOI: 10.1111/jofi.12971 | Cited by: 33
MARCO GIACOLETTI, KRISTOFFER T. LAURSEN, KENNETH J. SINGLETON
We study risk premiums in the U.S. Treasury bond market from the perspective of a Bayesian econometrician BLwho learns in real time from disagreement among investors about future bond yields. Notably, disagreement has substantial predictive power for yields, and BL's risk premiums are less volatile than those in the analogous model without learning. BL's forecasts are substantially more accurate than the consensus forecasts of market professionals, particularly following U.S. recessions. The predictive power of disagreement is distinct from the (much weaker) one of inflation and output growth. Rather, it appears to reflect uncertainty about future fiscal policy.
Pages: 443-479 | Published: 10/2020 | DOI: 10.1111/jofi.12979 | Cited by: 22
PHILIPP K. ILLEDITSCH, JAYANT V. GANGULI, SCOTT CONDIE
We show that aversion to risk and ambiguity leads to information inertia when investors process public news about assets. Optimal portfolios do not always depend on news that is worse than expected; hence, the equilibrium stock price does not reflect this bad news. This informational inefficiency is more severe when there is more risk and ambiguity but disappears when investors are risk‐neutral or the news is about idiosyncratic risk. Information inertia leads to news momentum (e.g., after earnings announcements) and is consistent with low household trading activity. An ambiguity premium helps explain the macro and earnings announcement premium.
Pages: 484-484 | Published: 1/2021 | DOI: 10.1111/jofi.13000 | Cited by: 1
Laura Starks
Pages: 485-486 | Published: 1/2021 | DOI: 10.1111/jofi.12791 | Cited by: 0