Strategy

We follow a representative panel of millions of consumers in the U.S. from 2007 to 2017 and document several facts on the long-term effects of the Great Recession. There were about six million foreclosures in the ten-year period after Lehman's collapse. Owners of multiple homes accounted for 25% of these foreclosures, while comprising only 13% of the market. Foreclosures displaced homeowners, with most of them moving at least once. Only a quarter of foreclosed households regained homeownership, taking an average four years to do so.

An historical review of managers' corporate renewal decisions reveals an evolving pattern away from using operating turnarounds in favor of making changes in corporate scope via transactions. One explanation for this progression away from operations is that financial valuation considerations supplant other inputs to managers' strategic logics — a reflection of the rising influence of financial institutions as activist owners.

In late 2007, less than 10 years into the company’s existence, Google came out swinging on the clean energy front. To a fanfare of plaudits up and down Silicon Valley and well beyond, it declared “RE<C” as its goal: make renewable energy cheaper than coal. The company invested tens of millions of dollars into R&D efforts from concentrated solar power to hydrothermal drilling. Four years later, those efforts had been scrapped.

We propose a parsimonious model of leverage and investment dynamics featuring a diffusion-jump cash-flow process, retained earnings, short-term debt, and external equity. Crucially equity issuance is costly. We show that firms' efforts to avoid incurring equity issuance costs generate empirically plausible target leverage and nonlinear leverage dynamics. Paradoxically, it is the high cost of equity issuance that causes the firm to keep leverage low, in contrast to the predictions of Modigliani-Miller and Leland tradeoff and Myers' pecking-order theories.

Product personalization opens the door to price discrimination. A rich product line allows for higher consumer satisfaction, but the mere choice of a product carries valuable information about the consumer that the firm can leverage for price discrimination. Controlling the degree of product personalization provides the firm with an additional tool to curb ratcheting forces arising from consumers' awareness of being price discriminated.

The initial phase of the COVID-19 pandemic was characterized by voluminous, highly negative news coverage. Markets overreacted to uninformative news, and reacted more to news during high volatility periods. News coverage responded to lagged market activity, and causally impacted contemporaneous returns. The early part of the pandemic was characterized by pronounced feedback between news and markets. I propose a structural break test to identify the presence and end of such feedback episodes. This one ended in March 2020, which was knowable by the end of April.

Mutual fund prospectuses contain a wealth of qualitative information about fund strategies, yet a systematic analysis of this content is missing from the literature. We use machine learning to group together funds with similar strategy descriptions, and ask whether they act in accordance with the text. Despite weak legal recourse for investors, we find that mutual funds largely do keep their promises. We document a market-based disciplinary mechanism: when funds diverge from their group's core strategy, investors withdraw capital.

This paper studies systemic risk in the interbank market. We first establish that in the German interbank lending market, a few large banks intermediate funding flows between many smaller periphery banks. We then develop a network model in which banks trade off the costs and benefits of link formation to explain these patterns. The model is structurally estimated using banks' preferences as revealed by the observed network structure before the 2008 financial crisis.

Corporate bond market participants are increasingly worried about liquidity. However, bid-ask spreads and other standard measures indicate liquidity has not deteriorated significantly. This paper proposes a potential reconciliation. We show the sensitivity of credit yields to bid-ask spreads increased fourfold from 2005 to 2019. We then provide a model that connects this change to the rapid growth of mutual funds in the corporate bond market. The model features heterogeneous investors with different trading needs who choose between a risk-free asset and illiquid bonds.