Nonbank lenders have been playing an increasing role in supplying debt, especially after the Great Recession. How important are the distortions in the greater regulation of banks that differentially limit risk-taking across alternative providers of credit? How might the growing role of nonbanks in credit markets affect financial stability? This selective review addresses these questions and discusses how banks and nonbanks helped provide liquidity to the nonfinancial sector during the COVID-19 pandemic shock. We argue that tighter bank regulation has created incentives for nonbanks to increase their participation in credit markets, a trend that creates concerns about financial stability.

We find that 43% of firms that make payouts also raise capital during the same year, resulting in 31% of aggregate payouts being externally financed, primarily with debt. Most financed payouts cannot be explained by payout smoothing in response to volatile earnings or investment (rather, they are the result of firms persistently setting payouts above free cash flow). In fact, 25% of aggregate payouts could not have been paid without the firms simultaneously raising capital. Profitable firms with moderate growth use debt-financed payouts to jointly manage their leverage and cash, thus highlighting the close relationship between payout and capital structure decisions.

Using a hand-collected sample of 18,269 equity analysts from 42 countries over the period of 2004 to 2019, we establish an intriguing negative association between a country’s institutional/economic development and its female share of equity analysts. We show that, in individualistic countries only, there is no gender gap in analyst forecast accuracy. We further show that female analysts are more skilled and more likely to drop out when underperforming in individualistic countries compared to peers in collectivistic countries. The evidence supports our hypothesis that the national cultural value of individualism encourages women to make career choices consistent with their general aversion to competition.

Using the macroeconomic forecasts of professional economists, we construct a comprehensive macro condition index that summarizes subjective expectations of output, inflation, and labor and housing market conditions. The index predicts stock returns and produces countercyclical equity premium forecasts, both in- and out-of-sample. Our results contrast with the procyclical subjective equity premia documented in recent literature. We show that the index reflects the true but unobserved macroeconomic condition that impacts the equity premium. Moreover, the predictability is not affected by belief biases and operates via a discount rate channel. The index’s predictability conforms to an explanation based on time-varying risk premia.

The credit default swap (CDS) Big Bang introduced 2 standard coupons for CDS trading. We exploit the setting of the 2 standard coupons as a natural experiment to quantify the components of the bid–ask spreads in over-the-counter markets. We find that a significant portion of the difference in the bid–ask spread between the 2 coupons is explained by the difference in funding costs. Furthermore, search intensity also explains the variation in the difference in bid–ask spread. The liquidity typically concentrates on one of the standard coupons and can suddenly switch to the other coupon. Using the sudden switch of the primary coupon, we provide further evidence to support the predictions of search-based liquidity models.

We examine compensation for endowment Chief Investment Officers (CIOs) overseeing portfolios with significant allocations to alternatives. We find widespread use of bonuses and that large endowments with high alternative allocations hire CIOs with stronger backgrounds, pay them more, and have higher pay-for-performance sensitivity. We find weak evidence of a relationship between compensation and future performance. Our results align with contract theory predictions but differ from empirical findings on pension funds. Endowments pay CIOs more, rely more on bonuses, attract more experienced professionals, and have lower turnover than pensions. This suggests more effective talent management compared to politically influenced public pensions.

Although federal judges are the ultimate arbiters of insider trading enforcement, the role of their political ideology in insider trading is unclear. Using the partisanship of judges’ nominating presidents to measure judge ideology, we first document that liberal judges are associated with heavier penalties in insider trading lawsuits than conservative judges. Next, we find that firms located in circuits with more liberal judges have fewer opportunistic insider sales. Cross-sectional analyses show that this deterrent effect is stronger when managers face a higher risk of insider trading lawsuits. Finally, we find that the Securities and Exchange Commission considers judges’ ideology when selecting litigation forums.

We introduce a test to assess mutual funds’ “conditional” performance that is based on updated information and corrects data snooping bias. Our method, named the functional false discovery rate “plus” ($ {\mathrm{fFDR}}^{+} $), incorporates fund characteristics in estimating fund performance free of data snooping bias. Simulations suggest that the $ {\mathrm{fFDR}}^{+} $ controls well the ratio of false discoveries and gains considerable power over prior methods that do not account for extra information. Portfolios of funds selected by the $ {\mathrm{fFDR}}^{+} $ outperform other tests not accounting for information updating, highlighting the importance of evaluating mutual funds from a conditional perspective.

I develop a dynamic model to investigate how labor mobility impacts firms’ decisions. In the model, firms make investment and financing decisions, hire labor with different skill and mobility levels, and set wages through bargaining. The model predicts that, in response to an increase in labor mobility, high-skill firms operate with lower financial leverage, become less responsive to investment opportunities, and invest at lower rates, while low-skill firms remain unaffected. I confirm these predictions in the data using shocks to workers’ mobility across firms. The results are useful in understanding the effects of labor mobility changes driven by government policies or technological shocks, such as the rise of remote work.

This study analyzes meetings of firms with policymakers at the European Commission (EC). Meetings with Commissioners are associated with positive abnormal equity returns for U.S. firms. Firms of the European Union (EU), however, do not experience significant value increases. We identify regulatory outcomes as a channel that can rationalize this difference in value effects of political access. U.S. firms with meetings are more likely to receive favorable decisions in their EC merger decisions than their EU peers. The results suggest that cross-border political access can alleviate uncertainties and alleged discriminatory behavior of regulators in foreign markets.

We investigate whether chief financial officers (CFOs) serving on U.S. corporate boards benefit shareholders in M&A transactions. We find that acquisitions made by firms with CFOs on boards have significantly better acquirer announcement returns. This is due to the CFO director’s ability to select targets with better strategic and financial fit. CFO board membership can create shareholder value if there are effective governance regimes restraining managerial entrenchment and CFOs’ interests are closely aligned with those of shareholders through equity ownership. Furthermore, sitting on boards enables CFOs to secure more and cheaper financing for their acquisitions.

Corporate bonds’ book-to-market ratios predict returns computed from transaction prices. Senior bonds (even investment grade) with the 20% highest ratios outperform the 20% lowest by 3%–4% annually after non-parametrically controlling for numerous liquidity, default, microstructure, and priced-risk attributes: yield-to-maturity, bid–ask spread, duration/maturity, credit spread/rating, past returns, coupon, size, age, industry, and structural model equity hedges. Spreads for all-bond samples are larger. An efficient bond market would not exhibit the observed decay in the ratio’s predictive efficacy with implementation delays, small yield-to-maturity spreads, or similar-sized spreads across bonds with differing risks. A methodological innovation avoids liquidity filters and censorship that bias returns.

We examine the effects of a severe climate event on local firms. Our data include 8,218 business credit reports and a detailed survey of 273 businesses in the area affected by Hurricane Harvey. Delinquent credit balances doubled in areas with the worst flooding, although nonflooded areas also had significant credit impairments. Only independent businesses showed signs of distress; subsidiaries of larger firms did not. Firms were largely uninsured and often were denied credit postdisaster. Many funded recovery informally, such as through friends and family. Our findings suggest that several financial frictions compound the challenges posed by a severe climate event.

Using comprehensive account-level data, we separate Chinese retail investors into 5 groups and document strong heterogeneity in trading dynamics and performances. Retail investors with smaller account sizes cannot predict future returns correctly, display daily momentum patterns, fail to process public news, and show overconfidence and gambling preferences, while retail investors with larger account balances predict future returns correctly, display contrarian patterns, and incorporate public news in trading. Using performance measures established in previous literature, we find that smaller retail investors suffer from poor stock selection abilities and trading costs, while large retail investors’ stock selection abilities are offset by trading costs.

This article shows that changes in the tone of central bank communication have a significant effect on asset prices. Tone captures how the central bank frames economic fundamentals and its monetary policy. A positive tone surprise is associated with increases in stock prices and interest rates, whereas credit spreads and volatility risk premia decrease. These tone effects are robust to controlling for policy actions as well as for conventional measures of monetary policy shocks. Our results suggest that communication tone is a powerful instrument of monetary policy, which affects risk premia embedded in asset prices.

Machine learning-based stock market beta estimators outperform established benchmark models both statistically and economically. Analyzing the predictability of time-varying market betas of U.S. stocks, we document that machine learning-based estimators produce the lowest forecast and hedging errors. They also help to create better market-neutral anomaly strategies and minimum variance portfolios. Among the various techniques, random forests perform the best overall. Model complexity is highly time-varying. Historical stock market betas, turnover, and size are the most important predictors. Compared to linear regressions, allowing for nonlinearity and interactions significantly improves predictive performance.

We develop methods for testing factor models when the weights in portfolios of factors and test assets can vary with lagged information. We derive and evaluate consistent standard errors and finite sample bias adjustments for unconditional maximum squared Sharpe ratios and their differences. Bias adjustment using a second-order approximation performs well. We derive optimal zero-beta rates for models with dynamically trading portfolios. Factor models’ Sharpe ratios are larger but standard test asset portfolios’ maximum Sharpe ratios are larger still when there is dynamic trading. As a result, most of the popular factor models are rejected.

We show that the negative relation between real investments and future stock returns is primarily driven by the subsample of firms building additional capacity. We develop a real options model to rationalize that evidence based on the premise that firms need to learn how to best operate modern capacity vintages, inducing idiosyncratic uncertainty in that capacity’s production costs over the learning period. Conversely, the uncertainty lowers the expected return of firms with newly built capacity until it is resolved. Further evidence based on profit sensitivities to aggregate conditions; analyst forecast-error volatilities; and high- versus low-tech industry subsamples supports our uncertainty explanation.

Antitakeover measures are controversial because the evidence of their net effect on shareholders is mixed. We propose that, for many firms, the potential bonding benefits outweigh the agency costs of the quiet life, explaining the mixed results. We study business combination and poison pill laws as exogenous shocks to takeover vulnerability and use shareholder valuation of internal slack as an indicator of the net effect of takeover protection. Firms susceptible to quiet life agency problems exhibit a decrease in the market-assessed value of internal slack. Conversely, cash appreciates at companies where takeover protection bonds commitments with major counterparties.

We examine how changes in foreign labor regulations affect U.S. multinationals’ operating strategies. We show that firms with integrated operations in countries where labor regulations become tighter tend to establish arm’s-length relations with local business partners in that nation. The substitution between integrated and arm’s-length operations is stronger toward joint ventures than suppliers and weaker in the presence of financial constraints. Our findings are consistent with the idea that when firms find it harder to terminate their workers in integrated operations, they change to an operating model where it is easier to replace or discontinue business partners instead of employees.