How Credit Cycles across a Financial Crisis
Pages: 1339-1378 | Published: 3/2025 | DOI: 10.1111/jofi.13431 | Cited by: 0
ARVIND KRISHNAMURTHY, TYLER MUIR
We analyze the behavior of credit and output in financial crises using data on credit spreads and credit growth. Crises are marked by a sharp rise in credit spreads, signaling sudden shifts in expectations. The severity of a crisis can be predicted by the extent of credit losses (spread increases) and financial sector fragility (precrisis credit growth). This interaction is a key feature of crises. Postcrisis recessions are typically severe and prolonged. Notably, precrisis spreads tend to drop to low levels while credit growth accelerates, indicating that credit supply expansions often precede crises. The 2008 crisis aligns with these patterns.
Banks, Low Interest Rates, and Monetary Policy Transmission
Pages: 1379-1416 | Published: 3/2025 | DOI: 10.1111/jofi.13436 | Cited by: 0
OLIVIER WANG
I study how the secular decline in interest rates affects banks' intermediation spreads and credit supply. Following a permanent decrease in rates, bank lending may rise initially but contracts in the long run. As lower rates compress deposit spreads even well above the zero lower bound, banks' retained earnings, equity, and lending fall until loan spreads have risen enough to offset the reduction in deposit spreads. A higher inflation target can support bank lending at the cost of higher liquidity premia. I find support for the model's predictions in U.S. aggregate and bank‐level data.
Pages: 1417-1462 | Published: 3/2025 | DOI: 10.1111/jofi.13432 | Cited by: 0
JOHN WILLIAM HATFIELD, SCOTT DUKE KOMINERS, RICHARD LOWERY
High commissions in the U.S. residential real estate agency market pose a puzzle for economic theory because brokerage is not a concentrated industry. We model brokered markets as a game in which agents post prices for customers and then choose which other agents to work with. We show that there exists an equilibrium in which each agent conditions working with other agents on those agents' posted prices. Prices can therefore be meaningfully higher than the competitive level (for a fixed discount factor), regardless of the number of agents. Thus, brokered markets can remain uncompetitive even with low concentration and easy entry.
Pages: 1463-1496 | Published: 4/2025 | DOI: 10.1111/jofi.13444 | Cited by: 1
NEIL BHUTTA, AUREL HIZMO, DANIEL RINGO
We assess racial discrimination in mortgage approvals using confidential data on mortgage applications. Minority applicants tend to have lower credit scores and higher leverage, and are less likely to receive algorithmic approval from race‐blind automated underwriting systems (AUS). Observable applicant‐risk factors explain most of the racial disparities in lender denials. Further, exploiting the AUS data, we show there are risk factors we do not observe, and these factors at least partially explain the residual 1 to 2 percentage point denial gaps. We conclude that differential treatment plays a more limited role in generating denial disparities than previous research suggests.
Social Security and Trends in Wealth Inequality
Pages: 1497-1531 | Published: 4/2025 | DOI: 10.1111/jofi.13440 | Cited by: 1
SYLVAIN CATHERINE, MAX MILLER, NATASHA SARIN
Recent influential work finds large increases in inequality in the United States based on measures of wealth concentration that notably exclude the value of social insurance programs. This paper shows that top wealth shares have not changed much over the last three decades when Social Security is properly accounted for. This is because Social Security wealth increased substantially from $7.2 trillion in 1989 to $40.6 trillion in 2019 and now represents nearly 50% of the wealth of the bottom 90% of the wealth distribution. This finding is robust to potential changes to taxes and benefits in response to system financing concerns.
Excess Capacity, Marginal q, and Corporate Investment
Pages: 1533-1592 | Published: 3/2025 | DOI: 10.1111/jofi.13439 | Cited by: 0
GUSTAVO GRULLON, DAVID L. IKENBERRY
Theory posits that when managers anticipate excess capacity, average q becomes a biased estimator of marginal q as the potential for underutilizing new capital reduces the marginal benefit of investing. After correcting for this source of measurement error, the explanatory power of Tobin's q substantially improves in time‐series and cross‐sectional regressions as well as in out‐of‐sample tests. These findings, together with a secular erosion in capacity utilization, help explain why corporate investment rates have been declining for decades despite average q increasing significantly. Our analysis indicates that economic rigidities have contributed to the persistent erosion in capacity utilization.
In Too Deep: The Effect of Sunk Costs on Corporate Investment
Pages: 1593-1646 | Published: 3/2025 | DOI: 10.1111/jofi.13430 | Cited by: 0
MARIUS GUENZEL
Sunk costs are unrecoverable costs that should not affect decision making. I provide evidence that firms systematically fail to ignore sunk costs and that this leads to significant investment distortions. In fixed‐exchange‐ratio stock mergers, aggregate market fluctuations after parties enter into a binding merger agreement induce plausibly exogenous variation in the final acquisition cost. These quasi‐random cost shocks strongly predict firms' commitment to an acquired business following deal completion, with an interquartile cost increase reducing subsequent divestiture rates by 8% to 9%. Consistent with an intrapersonal sunk cost channel, distortions are concentrated in firm‐years in which the acquiring CEO is still in office.
Intrahousehold Disagreement about Macroeconomic Expectations
Pages: 1647-1689 | Published: 3/2025 | DOI: 10.1111/jofi.13437 | Cited by: 0
DA KE
This paper highlights the simple fact that households typically consist of multiple members who may hold divergent views, a fact that existing approaches to measuring and modeling household macroeconomic expectations largely abstract from. Using unique data on the macroeconomic expectations of both spouses, I document substantial intrahousehold disagreement about inflation, economic recessions, and stock market returns. I further show that household asset allocation decisions are shaped by disagreement between spouses about future stock returns, and a preregistered randomized survey experiment confirms the causal impact of such disagreement on portfolio choice.
In the Red: Overdrafts, Payday Lending, and the Underbanked
Pages: 1691-1738 | Published: 3/2025 | DOI: 10.1111/jofi.13447 | Cited by: 0
MARCO DI MAGGIO, ANGELA MA, EMILY WILLIAMS
The reordering of transactions from “high‐to‐low” is a controversial bank practice thought to maximize fees paid by low‐income customers on overdrawn accounts. We exploit a series of class‐action lawsuits that mandated that some banks cease the practice. Using alternative credit bureau data, we find that after banks cease high‐to‐low reordering, low‐income individuals reduce payday borrowing, increase consumption, realize long‐term improvements in financial health, and gain access to lower‐cost loans in the traditional financial system. These findings suggest that aggressive bank practices can create demand for alternative financial services and highlight an important link between the traditional and alternative financial systems.
Conflicting Priorities: A Theory of Covenants and Collateral
Pages: 1739-1768 | Published: 4/2025 | DOI: 10.1111/jofi.13445 | Cited by: 1
JASON RODERICK DONALDSON, DENIS GROMB, GIORGIA PIACENTINO
We develop a theory of secured debt, unsecured debt, and debt with anti‐dilution covenants. We assume that, as in practice, covenants convey the right to accelerate if violated, but the new secured debt retains its priority even if issued in violation of covenants. We find that such covenants are nonetheless useful: They provide state‐contingent financing flexibility, balancing over‐ and underinvestment incentives. The optimal debt structure is multilayered, combining secured and unsecured debt with and without covenants. Our results are consistent with observations about debt structure, covenant violations, and waivers. They speak to a policy debate about debt priority.
Auctions versus Negotiations: The Role of the Payment Structure
Pages: 1769-1813 | Published: 4/2025 | DOI: 10.1111/jofi.13446 | Cited by: 0
FLORIAN HOFFMANN, VLADIMIR VLADIMIROV
We investigate a seller's strategic choice between optimally structured negotiations with fewer bidders and an auction with more competing bidders when payments can have a contingent component, as is common in mergers and acquisitions (M&A), patent licensing, and employee compensation. The key factor favoring negotiations is that it allows the seller to set her preferred payment structure—that is, the revenue‐maximizing mix of cash and contingent pay; reserve prices are of secondary importance. Negotiations are more likely to dominate if synergies increase in bidders' productivity types (as with acquirer‐target complementarities in M&A). Higher dispersion and magnitude of bidders' private valuations also favor negotiations.
Raising Capital from Investor Syndicates with Strategic Communication
Pages: 1815-1869 | Published: 4/2025 | DOI: 10.1111/jofi.13453 | Cited by: 0
DAN LUO
An entrepreneur makes offers to multiple investors to fund a project that requires a minimum investment. Concerned about other investors' decisions, each investor strategically communicates information about the project to others. When investors have conflicts of interest, those with contractually stronger incentives to invest attempt to persuade others to invest. Depending on the project's ex ante quality, the entrepreneur may promise investors different returns to create conflicts of interest and induce persuasion, or may promise investors an identical return to align their interests and induce truthful communication. The paper illustrates a new motivation for syndication and hierarchy within syndicates.
Pages: 1872-1873 | Published: 5/2025 | DOI: 10.1111/jofi.13460 | Cited by: 0