Journal of Financial and Quantitative Analysis

We show that banks use industry knowledge acquired through corporate lending in mortgage lending, a phenomenon we refer to as the “industry expertise channel.” Specifically, banks that specialize in particular industries expand their mortgage lending activity in regions where those industries are concentrated. The impact of industry expertise increases with information asymmetry and borrower risk…

This article studies how ESG and conventional mutual funds trade stocks during the COVID-19 crash. Both fund types trade individual stocks similarly: Net purchases of ESG stocks are less sensitive than other stocks to fund flows pre-crash, but sensitivities increase for all stocks during the crash. In contrast, ESG funds’ aggregate net purchases are less sensitive than those of conventional funds…

This article shows that exchange-traded funds (ETFs) “sample” their indexes, systematically underweighting or omitting illiquid index stocks. As a result, arbitrage activity between the ETF and its index has heterogeneous effects on underlying asset markets. Using an instrumental variables approach, we find that the trading activity of ETFs reduces liquidity and price efficiency and increases vol…

We develop a continuous-time model examining agency conflicts among controlling shareholders (managers), minority shareholders, and creditors in corporate investment decisions. The manager’s private benefits encourage overinvestment, while their equity stake and debt overhang lead to underinvestment. We show these offsetting incentive effects can achieve optimal investment timing under certain co…

We model the time-varying probability of consumption disasters with international risk interactions and estimate the model using national accounts data of 42 countries back to 1833. The estimated world and country-specific disaster probabilities accord well with historical macroeconomic disasters. A match of the equity premium requires a relative risk aversion coefficient of approximately 5, whic…

Predictive regressions of market returns on option-implied moments measured before pre-scheduled FOMC meetings show that tail risks play an important role in understanding the market risk premium around FOMC announcement days. Skewness and kurtosis, which capture investors’ expectations of the tails of the return distribution, robustly predict post-FOMC returns both in-sample and out-of-sample. T…

We examine how team allocation shapes mutual fund managers’ compensation as well as their future productivity and careers. Assignment to a high-quality team lowers immediate compensation but accelerates career development—sharpening investment skill, boosting media visibility, deepening industry and style specialization, and raising future revenue. Team quality also raises promotion odds and expl…

This article investigates sample selection bias in early-stage investment. We use comprehensive administrative data on the universe of new firm starts in Norway, allowing us to compare venture-backed firms with ex ante similar firms that do not receive venture funding. The valuation premium for venture backing is sizeable at firm birth and doubles over the first 5 years, implying a substantial up…

We document a strong, negative relation between the curvature of stock price paths (i.e., price-path convexity) and future short-horizon returns at both the aggregate and firm levels. This relation obtains regardless of the cumulative return during the convexity estimation period. At the aggregate level, convexity is a better predictor of future returns than many commonly used predictors. At the …

We document that firms prefer counties with higher ethnic diversity in locating their interstate investments, especially for those pursuing innovation, seeking to establish service centers, or managing a diverse workforce. We also find some evidence that interstate investment in high ethnic diversity locations results in increased patent applications, sales growth, positive media coverage, and ov…

We explore an overlooked phenomenon in mortgage markets: repayment of underwater mortgages. Using a sample of mortgages terminated between 2007 and 2016, we show that such repayment indeed occurs, and that it is affected by the same factors commonly used in studies of default: the magnitude of home equity and the borrower’s credit score, which captures default cost as well as liquidity. A novel i…

We argue that cross-ownership increases the amount of private information in stock prices, enhancing the ability of stock prices to provide feedback to managers. Consistent with this argument, we find greater cross-ownership heightens a firm’s investment- q sensitivity. This effect is stronger for firms with a lower propensity for voluntary disclosure and for firms whose managers hold less privat…

Using the near universe of online job postings from 2007 to 2021, we construct a firm-level metric of labor market power. We find that firms with higher labor market power tend to have higher financial leverage. Our findings are not driven by product market competition or correlated labor market characteristics. The evidence is less pronounced among firms hiring in occupations with high labor mob…

Using a proprietary data set covering all foreign investors’ daily trades in the Chinese stock market from 2016 to 2019, we find that foreign order flows, facilitated by regulatory liberalization through several channels, present strong predictive power for future stock returns, implying that these order flows are likely informed. We track the source of this informativeness and find that foreign …

Using high-frequency disagreement data from the investor social network StockTwits, we find that greater unsophisticated disagreement facilitates informed buying and selling. During periods of overvaluation, the facilitating effect of disagreement on trading is dampened for informed buyers but is amplified for informed sellers. These findings are unexplained by sentiment, news, and retail order f…