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We study the effects of going public using a unique panel of firms in 16 European countries for which we observe financial data before and after firms' initial-public-offering (IPO) attempts. We compare firms that complete their IPO with firms that withdraw their IPO. We instrument the going public decision using prior market returns. We find that firm profitability goes up after going public—contrary to previous results in the literature. We also find an post-IPO expansion in the number of subsidiaries and countries in which IPO firms operate. Our results are stronger for firms in financially dependent industries and in countries with higher investor protection consistent with going public relaxing financial constraints and with a stronger impact when agency conflicts are lower. Overall, our results are consistent with going public inducing a shift towards a strategy of commercialization to increase profitability. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

In this paper, we have reviewed the COVID induced shock to the debt and deficit profiles of 10 of the largest economies by size of GDP in 2019 referred to in this paper as the Big-10 economies. There is a sharp upsurge in their government debt-GDP ratios because their policy responses to the COVID induced recession have been large fiscal stimuli based on borrowing. With low and often negative growth rates and high fiscal deficit, the debt-GDP ratios are projected to rise sharply in these economies. As normalcy is restored, these countries may attempt to sharply reduce their borrowing levels relative to GDP. However, we argue that before this is done, individual countries may do well to reassess their sustainability norms whether cast in terms of agreements such as the Maastricht Treaty or country level Fiscal Responsibility Legislations (FRLs) or other similar norms. This revision is called for because of the longer-term trends in these economies of rising money supply, falling nominal interest rates and nominal growth rate. The contribution of this article lies in highlighting that the existing FRL norms have become dated in the European and other similar economies because of significant changes in macro parameters such as the interest rate, the long-term growth rate and the government debt-GDP profiles of these countries as compared to the time when these norms were originally determined. There is thus a need now to re-determine these norms which may be higher than their current levels. Even though, some recent literature suggests that the sustainability benchmarks may have shifted upwards, we argue that the post COVID debt-GDP ratios have exceeded these revised benchmarks by significant margins in the case of a number of the Big-10 economies.

Owing to the decreased profitability of real economy and the significantly increased return on financial assets since the beginning of the 21st century, non-financial firms in China are increasingly inclined to hold more financial assets. This paper performs an empirical study on the relationship between the level of corporate financialization (the amount of financial assets held by non-financial firms) and managerial ability. According to the empirical results, more capable mangers, who show a higher level of risk tolerance and overconfident tendency, are more inclined to hold more financial assets. In additional analysis, we find that the increased risk of insolvency caused by high debt level can reduce managers’ risk-tolerance level. Therefore, a high debt level weakens the positive influence of managerial ability on the level of corporate financialization. Moreover, we observe that more volatile return or frothier prices of financial assets resulting from increased economic policy uncertainty or monetary liquidity will make mangers more cautious about assessing the risks in the investment of financial assets. Consequently, when economic policy uncertainty or monetary liquidity is higher, the positive influence of managerial ability on the level of corporate financialization is also weakened. By revealing how managerial ability influences the level of corporate financialization, this paper can provide guidance for investment decision-making, corporate risk control and policy making.

A firm’s publicly available information reflects ex ante committed information releases and ex post discretionary disclosures. In a setting wherein a firm’s CEO is concerned with stock market valuation and confrontations with the employee union, this paper endogenizes when the CEO retains ex post disclosure discretion and when the CEO curtails discretion, opting instead to ex ante commit to not gathering information or publicly disclosing information. The underlying economic forces entail a trade-off between the time-inconsistency problem (the CEO’s ex post preferences can diverge from the CEO’s ex ante goals) and how silence (absence of information) under the ex ante and ex post paths is valued differentially by the union. In effect, silence under different systems “speaks” differently, and this influences both the labor union’s incentives to engage in bargaining with the firm and the stock market’s pricing of the firm’s equity. This paper was accepted by Ranjani Krishnan, accounting.

This study examines whether taxpayers intentionally avoid IRS third-party reports. In 2017 an IRS amendment created an exogenous shock that impacted how third parties report gambling winnings to the IRS. In thoroughbred racing, this shock had a substantial impact on certain types of wagers. This paper considers how gamblers reallocated their money following the shock. Using a difference-in-differences research design that compares U.S. tracks to Canadian tracks, I find that gamblers increased their investment in wager types that had become less likely to trigger third-party reports by 27 percent. In the U.S., over $400 billion in tax revenue goes uncollected annually, largely due to unreported income. Third-party IRS reporting is considered the most effective way to reduce underreporting, but there is limited understanding of how taxpayers interact with third-party reporting rules. This paper provides evidence on this interaction, showing that taxpayers purposefully avoid third-party reports to facilitate tax evasion.

A recent literature has studied bunching at notches in tax systems; but work on the implications of bunching for welfare has been limited. We consider a setting where there are discrete changes in the enforcement of tax compliance at certain levels of reported income, creating notches that can lead to bunching. We find that greater levels of bunching can be associated with greater tax efficiency. A simulation exercise demonstrates that notches with greater bunching can be associated with higher welfare than notches with less bunching, and that a tax system with bunching at a notch can generate higher overall social welfare than a revenue-equivalent no-evasion linear tax. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

A growing body of literature finds that firm-level carbon emissions are associated with a number of adverse outcomes such as higher firm risk, lower firm value, higher option premiums to cover downside tail risk, and declines in future profitability. Given these adverse effects, this paper examines whether carbon emissions affect the financial reporting decisions of firms. Consistent with firms attempting to report higher income in periods of high carbon emissions, possibly in the hope of offsetting some of the negativity associated with the latter, we find the carbon emissions and real earnings management (REM) of firms to be positively associated. Providing evidence of a causal link, we find this relationship to have weakened following the largely exogenous event of the 2016 election of President Trump, which significantly decreased the cost of carbon emissions for firms. In cross-sectional tests, we find the relationship between carbon emissions and REM to be stronger (weaker) for firms located in states with more stringent (less stringent) enforcement of environmental regulations. Further, this relationship is weaker (stronger) for firms with stronger (weaker) corporate governance. We also find that the presence of more short-term oriented transient institutional investors exacerbates the association between carbon emissions and REM. The paper contributes to the literature on both the determinants of REM and firm-level consequences of carbon emissions.

This paper scrutinizes the role of prolonged, expansionary monetary policy on the saving behavior of Japanese households, focusing on the dramatic change of the household savings rate since 1998, from high to low saving. The literature generally attributes this change to the country’s shift from high-growth to low-growth and its demographic change. This paper empirically examines changes in the incentives for saving and the ability to save connected to monetary policy. It finds that monetary policy had a significant impact on Japan’s household saving behavior via the interest rate channel but not the labor income channel. There is also evidence that rising government deficits come along with declining household saving and that rising wealth boosts saving.

This paper studies how the effects of monetary and fiscal policy vary depending on the business cycle phase. It shows that in a medium-scale DSGE model, estimated on US data, monetary policy has a stronger impact on the economy in downturns and booms. Labor and capital income taxes display similar patterns. Government expenditure shocks and consumption tax shocks, on the contrary, have a stronger impact on output in depressions and recoveries. The paper also shows that accounting for the source of business cycle fluctuations is potentially important when assessing state-dependence in policy transmission.

This paper formally implements time-varying risk price models for currency returns. Focusing upon time variation in risk prices, the paper explores four currency risk factors. In addition to dollar and carry factors, we employ momentum and value factors which are widely used by currency investors. We find time variation in risk prices for the dollar factor is associated with the U.S. business cycle, with notable increases at the end of economic downturns. Constant beta models moreover have smaller pricing errors across all currency portfolios, which is in contrast to the stock and bond markets.

We present evidence that equity momentum strategies are partially driven by positive-feedback trading intermediated via the mutual fund sector. We identify a U.S.-specific structural break to this channel that substantially weakened the relationship between fund flows and past style returns. As a result, trading strategies that load on flow-driven positive-feedback trading (including momentum in stocks, styles, and factors) experienced a profitability decline. Consistent with the proposed channel, the profitability decline was limited to the U.S. market. Moreover, factors that were more directly exposed to the structural break experienced a sharp return “kink” in the months after the event. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

If the U.S. is on a fiscally sustainable path, then higher U.S. government debt/output ratios should reliably predict higher future surpluses or lower real returns on Treasurys. In the post-war sample, we find no evidence for this. Neither future cash flows nor discount rates account for the variation in the current debt/output ratio. Instead, the future debt/output ratio accounts for most of the variation. Systematic surplus forecast errors can account for part of these findings. Since the start of the GFC, surplus projections have anticipated a large fiscal correction that failed to materialize. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

PurposeThe purpose of this study is to examine the effects of the coronavirus disease 2019 (COVID-19) pandemic on sovereign credit default swap (CDS) spreads using a large sample of countries.Design/methodology/approachIn this paper, the authors use a wide set of the sovereign CDS data of 78 countries. To measure the magnitude of the COVID-19 pandemic, the authors use the daily change of confirmed cases collected from Our World in Data. They use panel regressions to estimate the impact of the COVID-19 pandemic on sovereign credit risk.FindingsThe authors show how sovereign CDS spreads have widened significantly in response to the COVID-19 pandemic. Based on the most conservative estimate, a 1% increase in COVID-19 infections leads to a 0.17% increase in sovereign CDS spreads. Furthermore, this effect is stronger for developing countries and countries with worse healthcare systems. Government policies partially offset the impact of the COVID-19 pandemic, although these same policies also lead to widening sovereign CDS spreads. Sovereign CDS spreads narrow dramatically several months after the outbreak of the COVID-19 pandemic. Overall, the results suggest that the ongoing COVID-19 pandemic has been a massive shock to the global financial stability.Originality/valueThis paper provides new evidence that COVID-19 widens sovereign CDS spreads. The authors further show that this widening effect is felt most strongly in developing economies.

The outbreak of the COVID-19 pandemic led to a sharp decline in the market value of the global equity markets. The purpose of this paper is to answer the following question: Do Compliant firms outperform the Non-Compliant during the COVID-19 pandemic? A compliant firm must satisfy the qualitative and quantitative criteria defined by Islamic law. Previous research focused on Compliant mutual funds, banks, and stock market indexes. Our paper stands out by sorting the cross-section of individual firms into Compliant and Non-Compliant firms and by analyzing the stock performance of both groups during the COVID-19 crisis. Our empirical investigation includes quarterly cross sectional regressions of stock returns and volatility during the first two quarters of 2020 and daily difference-in-difference regressions of daily stock performance during the COVID period starting from February 24th to April 17th of 2020. We find that Compliant stocks outperform the Non compliant peers during the pandemic. We highlight that this out-performance is not associated with higher firm-specific or total risk.

President Biden signed a $1.9 trillion COVID relief package (the “American Rescue Plan”) on March 11, 2021. Without a corresponding increase in taxes, this plan has set off alarm bells for those concerned about the expansion of government deficits and debt. Mainstream economists have raised issues of excessive inflation, “crowding out” of private sector investment, and an unacceptable repayment burden on the young and future generations. The purpose of this paper is to demonstrate that these concerns are based on a misunderstanding of the role played by the deficit, debt, and taxes in the U.S. economy, even a misunderstanding of how certain parts of the U.S. financial system actually work. The paper explores the beginnings of paper (fiat) currency and government bonds in the U.S. and demonstrates that without federal deficit spending, the private sector would lose steam and face a recession. Without federal bonds, the government would lose a lever to control interest rates and inflation, not to mention the private sector’s loss of a risk-free, interest-bearing alternative to cash. This is not to say all deficits (or all government expenditures, for that matter) are good. Some actually do cause excessive inflation, exacerbate wealth disparity or have other harmful effects. These are serious problems and they need to be addressed effectively. Simply raising taxes in an amount to match the spending is an example of an approach with limited effectiveness. The ideal is for large spending programs to be designed to be “inflation neutral,” that is, to include federal revenues (taxes) that are specifically designed to mitigate the inflationary impact of spending, to the extent and place it is expected to emerge. If that is not possible, then increased taxes, while possibly serving political, social, or other purposes, are not the solution to address excessive spending-induced inflation. The problem is, when excessive inflation emerges, the most frequently used tool for addressing it, monetary policy, has the pernicious effect of exacerbating the hurt on the most vulnerable citizens, lower-paid workers and, especially, people of color. This paper will also address deficiencies in fiscal and monetary policies, ideally before they actually become serious. In his press conference on March 25, 2021, President Biden identified the "battle between the utility of democracies in the 21st century and autocracies" as the real threat to the United States, noting that “We’ve got to prove democracy works.” The point of this paper is that only with a proper understanding of how our financial system actually works can our leaders make the best decisions impacting our nation for decades to come.

Using administrative firm-bank-loan level data from the U.S., we document four new facts about the credit market. First, private firms’ (SMEs’) borrowing from banks comprises their entire balance sheet debt, compared to large publicly listed firms who can switch between bond markets and drawing from their credit lines. Second, SMEs borrow shorter maturity and pay higher interest rates relative to large listed firms. Third, SMEs mostly use their enterprise’s continuation value as collateral rather than fixed assets and real estate. Fourth, the relation between collateral and risk—where risk is measured by the loan spread—is positive for large listed firms but negative for SMEs. Based on these facts, we show that monetary policy transmission and risk-taking differ across SMEs and large listed firms. When monetary policy is expansionary, credit demand of SMEs with high leverage increases more. SMEs’ borrowing capacity expands more given their frequent use of earnings and operations-based collateral. We find no evidence of risk-taking by banks as they lend less to firms who defaulted before and likely to default in the future. Our results from the sample of all U.S. firms mimic those of SMEs and imply that the aggregate effects of monetary policy might depend on the size distribution of firms and the type of collateral used. Since SMEs cover 99 percent of all firms and over 50 percent of U.S. employment and output, our results also have important implications for aggregate boom-bust cycles. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

This paper studies the impact of major U.S. macroeconomic news releases on price movements of selected instruments in asset classes including equity, foreign exchange, and fixed income over different time spans within a day. The results show that U.S. macroeconomic news surprises affect different asset classes to varying degrees. Price movements of long-term U.S. Treasury bond yield return and news surprises of non-farm payroll, as well as ADP employment change are positively correlated. The impact is also higher within five minutes after release. The results are consistent with earlier research which shows the bond market reacts more to macroeconomic news. Such information can help traders with risk management and alpha generation when trade macroeconomic data. The paper also examines recent news about equity performance on employment data which shows they are not always consistent.

We develop a theory of how corporate lending and financial intermediation change based on the fundamentals of the firm and its environment. We focus on the interaction between the prospective net worth or liquidity of an industry and the firm’s internal governance or pledgeability. Variations in prospective liquidity can induce changes in the nature, covenants, and quantity of loans that are made, the identity of the lender, and the extent to which the lender is leveraged. We offer predictions on how these might vary over the financial cycle. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

We exploit the unexpected announcement of an immediate, temporary VAT cut in Germany in the second half of 2020 as a natural experiment to study the spending response to unconventional fiscal policy. We use survey and scanner data on households’ consumption expenditures and their perceived pass-through of the tax change into prices to quantify its effects. The temporary VAT cut led to a substantial relative increase in durable spending of 36% for individuals with a high perceived pass-through. Semi- and non-durable spending also increased. According to our preferred estimates, the VAT policy increased aggregate consumption spending by 34 billion Euros. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

In this paper, we examine the impact of credit rating changes on the financing decisions of overconfident CFOs. We find that CFO overconfidence significantly increases the sensitivity of net debt issuances to the rating changes, particularly when firms have no access to low-risk debt. Specifically, we establish that speculative-grade firms with overconfident CFOs reduce net debt issuance following rating changes (i.e. upgrades and downgrades). Our results hold after controlling for CEO bias. Furthermore, we document that CEO overconfidence has explanatory power on firm financing policies as it generates the potential multiplier effect on debt conservatism, as well as on investment return. Findings of our paper are robust to model specifications and to the endogeneity bias.

This paper used an economic model of systemic risk given by Acharya (2016) to measure the state of systemic risk in Indian financial market during COVID-19 Pandemic. It is based on marginal expected shortfall (MES), the likelihoods of a financial firm to be undercapitalized when the financial system as a whole is undercapitalized. The paper empirically measures the MES of financial firms of NIFTY 50 for pre-COVID year 2019-20 and COVID year2020-21 and found that the undercapitalization of Indian financial firm has increased 3 fold during COVID-19 Pandemic ensuing systemic risk has been increased during COVID-19 year to pre-COVID year. The result is also supported by daily stock return correlations of financial firms which is a simple and robust indicator of systemic risk. It has been found that the correlations of financial firm stock returns among themselves and market index as well is increased during COVID-19 pandemic that led to rise in systemic risk. Higher correlations among financial firms are a prerequisite for systemic failure.

PurposeThe paper examines the impact of COVID-19 on bank stock returns over various time scales and frequencies for 36 countries. Moreover, the authors look at the governments' responses to the corona crisis and examine its impact on bank stock returns.Design/methodology/approachThe paper applies continuous wavelet transformation to obtain robust estimates of the co-movement (coherency) between confirmed cases and bank stock returns over time and at different time scales. Furthermore, the authors apply fixed effects panel regression to examine the response of bank stocks to domestic COVID-19 policies.FindingsThe results indicate that the number of confirmed COVID-19 cases negatively impacts bank stock returns during different waves of the pandemic in the medium-run. However, there is only little dependence in the very short-run. Moreover, bank stock returns positively react to domestic COVID-19 polices. This demonstrates that governmental interventions not only reduce the spread of COVID-19 but are also able to thereby calm financial markets.Originality/valueThe application of wavelet methods to the field of economics and finance is relatively recent and allows the distinction between short-term and long-term effects. Standard econometric methods, in contrast, only operate within the time domain. This paper combines wavelet methods with conventional econometrics to answer the research question.

This paper investigates the value relevance of banks’ capital structure voluntary choices, their determinants, and preference in terms of funding mix policy models, using a unique survey-based dataset gathered through a face-to-face interview structured questionnaire, conducted to a sample of 51 Portuguese banks’ CEOs (89.5% survey response rate), over the 1989-1998 period. Survey participants, elicited ownership structure managerial control, growth opportunities, reputation in banking markets, financial flexibility, information signaling, bank size, share listing, business risk, dividend policy, and debt tax-shields, as the most relevant capital structure determinants at the bank level. The supervisory and regulatory discipline was indicated as the more influential external determinants for capital structure choice. A majority of 60 percent of state-owned bank CEOs declared a preference for following pre-determined guidelines on bank funding as capital structure policy model. Almost 53 percent of the privately-owned bank CEOs revealed a significant preference for the tradeoff capital structure policy model. The pecking order and the market-timing theories received moderate to weak preference. The paper extends the literature, providing field evidence that banking capital structure choice do matter and may be explained within the framework of the conventional corporate capital structure theory.

This paper investigates the time-varying spillovers among cryptocurrency, green and fossil fuel investments. Using a TVP-VAR network connectedness model, we find that the spillovers among cryptocurrency, green and fossil fuel assets vary over time and that they are more pronounced during crisis periods. Our results also reveal asymmetric spillovers among these assets, where negative return spillovers are larger than positive return spillovers. We conclude our paper by discussing the implications of our results for policymakers and investors.

In this paper, we assess the effects of contingent convertible bonds (CoCos) in terms of stability of the banking sector and the economy as a whole. The analysis builds upon a stock-flow consistent agent-based model. The paper argues that the bail-ins that result from the activation of CoCos in a crisis not only partially replace costly bailouts for the taxpayer, but also effectively prevent bank failures and contribute to higher average capital adequacy ratios. This stabilization of the banking sector is positive for the economy as a whole as long as the volume of CoCos in circulation is not too high. Above a certain volume, their activation negatively affects macroeconomic aggregates, as CoCos reinforce the effects of a crisis rather than mitigate them. It is therefore in the regulator's interest to control the expansion of the CoCo market.

This paper examines the short- and long-run effects of U.S. federal personal income and corporate income tax cuts on a wide array of economic policy variables in a data-rich environment. Using a panel of U.S. macroeconomic data set, made up of 132 quarterly macroeconomic series for 1959-2018, the study estimates factor-augmented vector autoregression (FAVARs) models where an extended narrative tax changes dataset combined with unobserved factors. The narrative approach classifies if tax changes are exogenous or endogenous. This paper identifies narrative tax shocks in the vector autoregression model using the sign restrictions with Uhlig's (2005) penalty function. Empirical findings show a significant expansionary effect of tax cuts on the macroeconomic variables. Cuts in personal and corporate income taxes cause a rise in output, investment, employment, and consumption; however, cuts in personal taxes appear to be a more effective fiscal policy tool than the cut in corporate income taxes. Real GDP, employment, investment, and industrial production increase significantly and reach their maximum response values two years after personal income tax cuts. The effects of corporate tax cuts have relatively smaller effects on output and consumption but show immediate and higher effects on fixed investment and price levels., 46 pages

This paper examines the impact of Olympic Sponsorship announcements on stock returns for sponsors of the ten Olympic Summer Games held between 1984 and 2020. The paper finds that sponsorship announcements are associated with an average 0.44% impact on returns on the announcement day. This increase translates to a $61 million increase in sponsoring firms’ market value, on average. The study also documents significant differences in the impact of Olympic sponsorship announcements on domestic versus foreign sponsors’ stock returns as well as significant differences on the returns of Olympic Partners versus Olympic Supporters. Abnormal returns for firms domiciled in the host country are shown to be significantly higher than abnormal returns for firms domiciled outside the host country. Also, abnormal returns are significantly higher for Olympic Partners, who pay a higher sponsorship fee, than for Olympic Supporters, who pay a lower price. Overall, our findings imply that Olympic sponsorship is a value-creating strategy, especially for domestic firms.

On August 11, 2021, the U.S. Bureau of Labor Statistics reported a 5.4% per year increase in the CPI for the third consecutive month, intensifying the ongoing debate about whether high inflation will prove temporary or more lasting. This paper seeks to inform this debate by evaluating the current conditions contributing to the recent uptick in inflation and comparing them to conditions that caused similar episodes of high inflation in the past. The paper concludes that inflationary pressures are likely to be temporary, perhaps resembling the two-year period that followed World War I and the Great Influenza. It appears highly unlikely, however, that the United States is on the brink of another Great Inflation, which lasted from 1968 to 1982. The primary reason is that the Federal Reserve of today is much less likely to suffer from the philosophical biases, knowledge gaps, and political pressures that allowed the Great Inflation to occur. If the conclusions in this paper are correct, they may prove valuable to investors. Should elevated levels of inflation prove temporary, over-reactions may lead to decisions that impair an investor's long-term objectives rather than foster their achievement.

We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks to stock returns across countries and sectors using a newly constructed dataset. Our estimation strategy is based on a standard open-economy production network model that delivers a spillover pattern consistent with a spatial autoregression (SAR) process. We use the SAR model to decompose the overall impact of U.S. monetary policy on global stock returns into a direct and a network effect. We find that nearly 70% of the total impact of U.S. monetary policy shocks on country-sector stock returns are due to the network effect of global production linkages. Empirical counterfactuals show that shutting down global production linkages would reduce the total global impact of U.S. monetary policy shocks by half. Our results are robust to changes in the definitions of stock returns and monetary policy shocks, to controlling for correlates of the global financial cycle, foreign monetary policy shocks, and to alternative empirical specifications. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

From 2011 to 2014, the Brazilian government conducted a heavily advertised major credit expansion program through government banks as part of its effort to stimulate the economy. Using administrative data on individual-level borrowing and spending, we find that the program led to a substantial rise in borrowing by government employees, especially those with low financial literacy. We trace the impact of credit stimulus on borrowers' consumption through the 2011-16 business cycle, and find that the credit stimulus resulted in higher consumption volatility and lower average consumption over the cycle. Our results suggest a potential downside of using household credit as stimulus in emerging markets. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

The aim of this paper is to define and isolate the drivers of speculative cash hoarding phenomena in publicly traded non-financial American firms before and after the financial crisis of 2008. The model presented in this paper uses previous literature defined drivers of transaction and precautionary motives for holding cash as control variables, and introduces new measures for market endorsement and economic conditions, that were never used before in this context. Empirical results show that cash accumulation is prominent among profitable firms, and that cash accumulation in excess of ongoing and precautionary needs of companies was endorsed by the financial markets both before and after the financial crisis of 2008. Results also support previous findings that financially unconstrained firms have a lesser need for market endorsement for cash hoarding. The contribution of this paper to the body of literature related to cash management and cash hoarding is five-fold: (i) it provides empirical evidence of market-endorsed cash hoarding in the US non-financial companies; (ii) it extends the existing models of transaction-related cash holdings to include, formally define and test the drivers of precautionary cash accumulation in the non-financial sector; (iii) it formally defines and tests a metric for market sentiment related to cash hoarding before and after the financial crisis of 2008; (iv) provides empirical evidence that the crisis of 2008 was anticipated by the corporate sector as early as 2005, and recovery from the crisis was predicted as early as Q2:08; and (v) defines and quantifies the border separating the precautionary and speculative motives for cash accumulation.

Recent proposals to expand the Child Tax Credit (CTC) are at the center of current policy discussions in the United States. We study the fiscal cost of three such proposals that would expand refundability of the credit to low-income children, increase the maximum credit amount, and/or eliminate the income phase-out to make the credit universal. For each proposal, we use the Current Population Survey to estimate three components of the net fiscal cost: the direct cost (additional tax refunds or lower tax liability), revenue changes due to taxpayers’ labor supply responses, and long-term changes in tax revenue due to changes in children’s future earnings. We find that direct costs are by far the most important component but that long-term earning changes also play an important role, offsetting 20% of the direct costs of making the credit fully refundable. In contrast, labor supply responses modestly contribute to the fiscal cost of the CTC expansions we model. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

The Global Financial Crisis of 2007--2009 and its aftermath have called for a rethink of the role of money in shaping business cycle fluctuations. To this end, this paper studies a New Keynesian model with money (liquidity). In the model, agents hold government money and other financial assets. However, there is a "short rate disconnect" (i.e., an interest rate spread) between the policy rate on money and the interest rate on household's savings. The paper shows that there exists a meaningful "liquidity effect" that is quantitatively significant for the macroeconomy. As the spread increases, so does the price of liquidity. In a model where consumption and money are complements, such an increase in the opportunity cost of money induces agents to consume less and work less. Both the effects imply that the real wage can fall, which in turn puts downward pressures on inflation via the New Keynesian Phillips curve. The fall in inflation makes the monetary authority cut the nominal interest rates by more, but at the cost of increasing the spread even further. In addition, the paper compares the dynamic responses to technology shocks and monetary policy shocks for the model with liquidity and the standard New Keynesian model. The results show that the responses can be quantitatively different for the two models. Finally, this paper studies the interaction between the liquidity effect and monetary policy, highlighting the liquidity effect that can play in business cycles.

The Federal Reserve and Bank of Japan corporate bond purchase programs in response to the COVID-19 crisis primarily target bonds with five years or less remaining to maturity. This paper documents evidence suggesting that firms in Japan, but not in the U.S., have catered to the maturity-specific demand shock by shifting the maturity of new bond issues. Most strikingly, in Japan, there is a large and disproportionate reduction in issuance of bonds maturing in seven years, a previously popular maturity just above the maturity eligibility criterion. I argue that Japanese results are consistent with heterogeneous firms facing a trade-off between the gain from shortening maturities to match the positive demand shock and the cost of deviating from their intrinsically optimal maturities. An analysis of simultaneous issuances of multiple-maturity bonds further supports the catering explanation. Thus, this paper documents a novel unintended effect of corporate quantitative easing (QE) and has important policy implications.

This paper reevaluates the low volatility investing strategies and, in particular, their tax efficiency. Low volatility strategies intend to help investors achieve market-like equity returns, but with less risk than that of the broader market. Among the low volatility strategies, those with lower volatility carry lower returns, but incur higher turnover and tax burdens. Explicit tax management can greatly improve the strategy performance. Tax management, nevertheless, is no easy task in practice due to the burdensome record keeping. This paper proposes two sets of tax managed low volatility investing strategies that require different amount of record keeping. Both strategies can significantly improve the after-tax strategy returns, while maintaining the compelling risk and pre-tax return profile. Specifically, accounting for net taxable gains alone can harvest most tax alphas, and accounting for the timing of tax lots accurately in addition can further improve the strategy performance.

This paper illustrates the tools used at Banca d’Italia (BI) to monitor the evolution of inflation expectations. The paper also surveys the analyses conducted at BI to assess how inflation expectations affect agents’ choices and the economy. The first part discusses the measures of inflation expectations derived from the prices of inflation-linked financial instruments and from the surveys of professional forecasters. The second part focuses on the measures of households’ and firms’ inflation expectations collected by BI, along with analyses presenting empirical evidence that expectations do indeed drive agents’ economic choices. The last part analyses the overall effect of exogenous changes of inflation expectations on the real economy, through the lens of the macroeconomic models used at BI.

This paper is the first paper to comprehensively analyze the impact of disclosure of commitments by insiders to participate in rights offerings in the US. Fried and Spamann (2020) have shown theoretically that such disclosures could help minority shareholders overcome information asymmetries by allowing them to mimic the participation decisions of insiders. This paper finds empirical evidence that these disclosures are not always sufficient to facilitate mimicking. The lack of transferable subscription rights and the presence of private benefits are associated with increases in insider ownership, which suggests that these features are barriers to mimicking. The paper also finds evidence of positive abnormal stock returns around the announcement of insider participation in rights offerings, which suggests that this signals asymmetric information to the market. Together, this is evidence that cheap-stock tunneling may occur in US rights offerings.

PurposeTheory suggests that the market for corporate control, which constitutes an important external governance mechanism, may substitute for internal governance. Consistent with this notion, using a novel measure of takeover vulnerability primarily based on state legislation, this paper aims to investigate the effect of the takeover market on board characteristics with special emphasis on board gender diversity.Design/methodology/approachThis paper exploits a novel measure of takeover vulnerability based on state legislation. This novel measure is likely exogenous as the legislation was imposed from outside the firm. By using an exogenous measure, the analysis is less vulnerable to endogeneity and is thus more likely to show a causal effect.FindingsThe results show that a more active takeover market leads to lower board gender diversity. Specifically, a rise in takeover vulnerability by one standard deviation results in a decline in board gender diversity by 10.01%. Moreover, stronger takeover market susceptibility also brings about larger board size and less board independence, corroborating the substitution effect. Additional analysis confirms the results, including propensity score matching, generalized method of moments dynamic panel data analysis and instrumental variable analysis.Originality/valueThe study is the first to explore the effect of the takeover market on board gender diversity. Unlike most of the previous research in this area, which suffers from endogeneity, this paper uses a novel measure of takeover vulnerability that is probably exogenous. The results are thus much more likely to demonstrate causality.

Central Bank Independence has often been praised as a “free lunch” as it lowers inflation with no costs to output. This paper, instead, claims that in a peculiar monetary union such as the European Monetary Union (EMU) defending the independence during a financial crisis can be macroeconomically costly: unconventional monetary policies may expose the European Central Bank (ECB) to the threat of fiscal dominance which, in turn, might endogenously shift the ECB’s fiscal stance toward fiscal conservatism. Fiscally hawkish signals can then depress GDP and inflation, thereby forcing the ECB to prolong the unconventional stimuli to achieve its target. This paper finds evidence of this new “doom-loop” at the core of the EMU.

This paper investigates whether managers’ personal connections help corporations to escape the productivity trap. Leveraging the heterogeneity in the severity of the GreatRecession across different sectors, the paper reports that (i) the Great Recession has a negative effect on corporate productivity, (ii) the effect is long-lasting and persistent, supporting a productivity-hysteresis hypothesis, (iii) the value of managers’ personal connections are counter-cyclical and indeed allow corporations to escape the productivity trap primarily via favorable credit conditions, in periods of high information asymmetries and tight credit constraints.

This paper analyses empirically the effect of judicial efficiency on bank credit contractual terms for the universe of Italian corporations borrowing from the banking sector. Exploiting within-country variation in the length of bankruptcy proceedings across different jurisdictions, the paper uses a spatial regression discontinuity design that compares credit conditions applied to firms located in municipalities on different sides of jurisdiction borders, controlling for bank characteristics. The results show that judicial efficiency is associated with a reduction in the cost of credit as well as with an increase in its availability for firms, in particular for those at high risk of default. Judicial efficiency increases leverage and investment for high risk firms. All these results suggest that the banking system tilts credit conditions in favor of safe firms as court inefficiency increases. Finally, court efficiency is also associated with a reduction in both the stock and the flow of Non Performing Loans.

We incorporate diagnostic expectations, a psychologically founded model of overreaction to news, into a workhorse business cycle model with heterogeneous firms and risky debt. A realistic degree of diagnosticity, estimated from the forecast errors of managers of US listed firms, creates financial fragility during good times. This mechanism produces countercyclical credit spreads and yields two key features of observed credit cycles. First, it generates boom-bust dynamics at the firm and aggregate levels: cheap credit predicts future increases in spreads, low bond returns, and investment drops. Second, it produces the spike in spreads observed in 2008-9 from modest negative TFP shocks. Diagnostic expectations offer a parsimonious mechanism generating realistic financial reversals in conventional business cycle models. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

This paper makes the case for the adoption of nominal income targeting in the context of an improved governance and accountability framework for the Reserve Bank of Australia (RBA). The paper begins by outlining the existing governance and inflation targeting framework for Australian monetary policy. The RBA has increasingly underperformed its inflation and full employment mandates under this framework because of a combination of policy errors and policy choices. This left the Australian economy with a weak starting point going into the COVID-19 pandemic. The RBA’s initial response to the pandemic was limited due to its reluctance to embrace large-scale asset purchases (LSAP). A nominal income target, supported by governance and accountability reforms, would improve monetary policy decision-making by alleviating the knowledge problems faced by policymakers. The paper also shows how public policy could support a nominal GDP (NGDP) futures market to better inform monetary policy decisions.

Because positive spillovers give investment in innovation a social rate of return several times higher than its internal rate of return to innovators, innovation is chronically underfunded. Recurrent manias, panics and crashes in stock markets inundate “hot” new technologies with capital. To the extent that manias compensate for chronic underinvestment in innovation, competition at the economy-level may favor institutions and behavioral norms conducive to innovation-related bubbles despite ultimately low returns to the hindmost investors. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

English Abstract: This paper explores the heterogeneous effects of monetary policy on consumption between workers and retirees. Using household-level data from the U.S., Italy, Japan and Korea, we first show that the consumption of retirees responds less sensitively to monetary policy shocks than that of workers, and that the different weight of interest income in the total income caused by the difference in financial asset holdings between these two groups is one of the main sources of this heterogeneity. We then extend a life-cycle model a la Gertler (1999) by adding sticky prices and monetary policy in order to study the mechanism of the differential effects on consumption of workers and retirees of monetary policy shocks. Consistent with the empirical evidence, the simulation results of the model show that the consumption of retirees is less sensitive to monetary policy shocks than that of workers, and that the larger weight of interest income for retirees compared to that of workers plays a key role in generating these results. The results of this paper imply that population aging can weaken the effectiveness of monetary policy.

This paper examines the interest rate channel of monetary policy transmission. It assesses the impact of banking structural factors on commercial bank pricing decisions and their pass-through in Sri Lanka. The empirical analysis uses aggregate monthly interest rates data from January 2008 to December 2018, a total of 132 observations. The findings suggest that the interest rate pass-through is significant overall, but incomplete. The credit quality, operational efficiency and excess liquidity play essential roles in explaining the adjustments of the bank lending and deposit rates. Non-performing loans increase the lending rate, and this result is robust to different combinations of the control variables. This suggests that banks with higher proportions of non-performing loans attempt to pass their credit losses on to customers. Further, bank inefficiency is passed on to customers in the form of lower deposit rates and excess liquidity in the banking system, both of which have a negative effect on the interest rate adjustments of both lending and deposit rates. A puzzling negative relationship is observed between the lending rate and operational inefficiency. The findings of this paper support the claim that banks in Sri Lanka take into consideration their structural factors as well as the monetary policy rates when setting the lending and deposit rates.

This paper studies the exchange rate effect on the trade balance for the major oil exporters Kazakhstan and Russia. Results from baseline tests of the Marshall Lerner condition indicate that an exchange rate depreciation actually decreases exports and deteriorates the trade balance, the opposite of traditional theory! To understand the results, the paper first augments the traditional theory to take into account the behavior of oil prices in the export and trade balance equations. The augmented theory posits that a decrease in the oil price leads to a real exchange rate depreciation and a decline in exports, thereby creating the positive correlation seen in the baseline results. In accordance with the augmented theory, the regression results suffer from omitted variable bias; when the oil price is taken into account the results again support the theory.

We show that the specific factors model can be used to derive a rigorous link between movements in stock prices and productivity, wages, employment, output, and welfare. We also prove that the commonly used measure of the effective rate of protection equals the dual measure of revenue TFP, providing a theoretical foundation for why many studies have found that trade liberalization significantly increases firm-level productivity. Our method enables us to trace a tariff announcement's effect on TFP through its impact on macro variables (e.g., exchange rates) and through its effect on the relative prices of imports. We apply this framework to understanding the implications of the U.S.-China trade war. Our results show that the trade-war announcements caused large declines in U.S. stock prices, expected TFP, and expected inflation largely by moving macro variables, but also by causing declines in the returns of firms trading with China. We find that markets expect the trade war to lower U.S. welfare by 7.8 percentage points, which is much larger than the predictions of static models but in line with those of dynamic models. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

In this paper, I attempt to understand the mechanisms underlying the price of remittances. I do so by using a cross-country analysis over the 2010s. More specifically, this paper highlights how the remittances service providers adjust to a change in the demand for remittances. To address endogeneity as well as severe measurement errors, I use data on environmental disasters that occurred in the country receiving remittances as an instrument. The results show that, overall, a positive change in demand for remittances does push up the prices with a delay of one quarter and that this increase persists for 18 months. This delay highlights the market capture and frictions that prevail in the (incomplete) remittances market. Another result is the evidence of heterogeneity of the response, depending on the type of remittances, the countries involved, and the degree of competition: the fastest transfers are more subject to price increases, as are corridors with the least amount of providers. Reassuringly, environmental catastrophes contemporaneously affect the remittances and are highly impactful. A high frequency of the data is important to catch the effect of the disasters on remittances.

Russian Abstract: Настоящее исследование посвящено оценке степени жесткости цен производителей в российской экономике и выявлению особенностей реакции различных отраслей на шоки монетарной политики с учетом гетерогенности параметра жесткости. В первой части работы проведен обзор теоретических подходов к моделированию жесткости цен производителей, включая модели, в которых пересмотры цен зависят либо только от времени, либо только от состояния экономики, а также модели гибридного ценообразования. English Abstract: In this paper we estimate the degree of producer price rigidity in the Russian economy and identify the response of various industries to monetary policy shocks, taking into account the heterogeneity of the rigidity parameter. The first part of the paper reviews theoretical approaches to modeling producer price rigidity, including models in which price revisions depend either only on time, or only on the state of the economy, as well as a hybrid pricing model.