2021 The Robert Day School of Economics and Finance Publications and Grants

* Indicates student co-author

Bjerk, David. “Socially Optimal Plea Bargaining with Costly Trials and Bayesian Juries.” Economic Inquiry, vol. 59, issue 1, 2021, pp. 263-279.

Abstract: Most models of plea bargaining assume jury behavior is exogenous in that it does not respond to the plea bargaining strategy employed by the prosecutor. This paper investigates optimal plea bargaining from society’s perspective when trials are costly, defendant guilt is uncertain, and jury beliefs and behavior respond to the plea bargaining strategy employed by the prosecutor. Under a variety of assumptions regarding parameter values, the model shows that when innocence rates among the arrested are low, the optimal plea bargaining policy is one in which all defendants receive plea offers acceptable to all defendants (a “universal pooling” policy). However, as the innocence rate among the arrested becomes more significant, the optimal plea bargaining policy switches to one in which plea offers are such that only guilty defendants find them acceptable, but only a subset of defendants receive a plea offer (a “partial separating” policy). Notably though, even when optimal, the societal benefits of such partial separating policies are limited due to the constraints on how widespread such separating offers can be made in equilibrium.

Burdekin, Richard C.K. “Death and the Stock Market: International Evidence from the Spanish Flu.” Applied Economics Letters, vol. 28, issue 17, 2021, pp. 1512-1520.

Abstract: The coronavirus pandemic in 2020 was the most devastating worldwide health threat since the 1918-1919 Spanish flu. Panel regression analysis for ten countries suggests that European and US stock markets reacted significantly, and negatively, to the surging death rates that were seen during the Spanish Flu. It is possible that the greater death rates for the Spanish Flu vis-a-vis the coronavirus account for stock market effects being more evident in 1918–1919 than in 2020.


Burdekin, Richard C.K., and Samuel Harrison*. “Relative Stock Market Performance during the Coronavirus Pandemic: Virus vs. Policy Effects in 80 Countries.” Journal of Risk and Financial Management, vol. 14, issue 4, 2021, 177.

Abstract: This paper examines relative stock market performance following the onset of the coronavirus pandemic for a sample of 80 stock markets. Weekly data on coronavirus cases and deaths are employed alongside Oxford indices on each nation’s stringency and government support intensity. The results are broken down both by month and by geographical region. The full sample results show that increased coronavirus cases exert the expected overall effect of worsening relative stock market performance, but with little consistent impact of rising deaths. There is some evidence of significantly negative stock market effects arising from lockdowns as reflected in the Oxford stringency index. There are also positive reactions to government support in March and December in the overall sample--combined with some additional pervasive effects seen in mid-2020 in Latin America.


Burdekin, Richard C.K., and Richard J. Sweeney. “The Evolution of Sovereign Debt Default: From the Thirteenth Century to the Modern Era.” Journal of European Economic History, vol. 50, no. 2, 2021, pp. 9-56.

Abstract: An examination of sovereign defaults over the long term, from 1294 to 2008, shows that serial defaults are far rarer than the much-ballyhooed experience of the 1980s suggests. The only mass default in Europe since 1294 took place in the early nineteenth century during the Napoleonic Wars. The majority of the serial defaults date from after 1975, primarily in Africa, Asia, and Latin America, and were heavily concentrated in the 1980s. These multiple defaults, like some earlier default waves in Latin America, reflected the experiences of newer nation states and were also linked to the inherent vulnerability of periphery countries to events in well-established, major financial centers. This was in sharp contrast to the earlier defaults in Europe and appears largely to be an aberration when viewed against the backdrop of the overall historical record.


Burdekin, Richard C.K., and Ran Tao. “From Shanghai to Sydney: Chinese Stock Market Influences on Australia.” Finance Research Letters, vol. 38, 2021, 101502.

Abstract: We examine whether China’s growing importance to Australia as both a trade partner and engine of growth has been accompanied by financial market interdependence. We consider effects on the overall Australian market as well as the iron ore sector, which has been accounting for over half of Australia’s exports to China in the years since the global financial crisis. Markov-switching analysis yields evidence of the Shanghai Composite being connected not only with the Australian iron ore sector but also the broad market Australian All Ordinaries index. These ties are found to be significant only during low volatility periods, however.


Burdekin, Richard C.K., and Ran Tao. “The Golden Hedge: From Global Financial Crisis to Global Pandemic.” Economic Modelling, vol. 95, 2021, pp. 170-180.

Abstract: This paper examines whether gold, and gold mining stocks, were an effective hedge during the 2020 global pandemic and 2008-2009 global financial crisis. Prior research suggests that gold’s hedging value is most evident during crisis periods, but none has compared the 2008-2009 and 2020 episodes directly. Dynamic conditional correlations and hedge ratios are estimated to determine the impact of rising market volatility on the hedging properties of physical gold and gold mining stocks. The results suggest that gold provided strong hedging value during the global financial crisis but did not consistently exhibit this property in 2020. There was less scope for hedging against losses in 2020 because the market recovered so quickly from the March 2020 lows. This contrasts with the extended stock market weakness following the onset of the global financial crisis.

Dass, Nishant, Vikram Nanda, Haemin Dennis Park, and Steven Chong Xiao. “Intellectual Property Protection and Financial Markets: Patenting vs. Secrecy.” Review of Finance, vol. 25, issue 3, 2021, 669-711.

Abstract: Firms rely on patenting and trade secrecy to protect their intellectual property. We study how changes in the trade-off between patenting and secrecy affect firms’ stock liquidity and financing outcomes. We show that an international trade agreement (TRIPS) that strengthened patent protection led to a 10.2% increase in patenting, accompanied by a 14.0%–27.1% improvement in stock liquidity for firms in patent-reliant industries. This in turn allows the affected firms to increase equity financing by 1.9% and reduce leverage by 5.9%. Our results suggest that policies that promote use of patenting over secrecy can reduce informational frictions in equity markets.


Dass, Nishant, Vikram Nanda, and Steven Chong Xiao. “Geographic Clustering of Corruption in the United States.” Journal of Business Ethics, vol. 173, 2021, pp. 577-597.

Abstract: We test the hypothesis that US corporations headquartered in states with greater public corruption are also prone to more unethical behavior when operating abroad. We exploit passage of Foreign Corrupt Practices Act (FCPA) that curtailed bribery of foreign officials and find firms in corrupt states, especially those exporting to more corrupt countries, suffer greater performance decline following FCPA, suggesting larger loss from anticipated bribery restrictions. Controlling for industry, firms in corrupt states are more likely to be targets of FCPA enforcement actions. They are also more likely to have paid foreign bribes, as disclosed during pre-FCPA investigations.

Aldy, Joseph, Matthew Kotchen, Mary Evans, Meredith Fowlie, Arik Levinson, and Karen Palmer. “Co-Benefits and Regulatory Impact Analysis: Theory and Evidence from Federal Air Quality Regulations.” Environmental and Energy Policy and the Economy, vol. 2, issue 1, 2021, pp. 117-156.

Abstract: This paper considers the treatment of co-benefits in benefit-cost analysis of federal air quality regulations. Using a comprehensive data set on all major Clean Air Act rules issued by the Environmental Protection Agency over the period 1997–2019, we show that (1) co-benefits make up a significant share of the monetized benefits; (2) among the categories of co-benefits, those associated with reductions in fine particulate matter are the most significant; and (3) co-benefits have been pivotal to the quantified net benefit calculation in nearly half of cases. Motivated by these trends, we develop a simple conceptual framework that illustrates a critical point: co-benefits are simply a semantic category of benefits that should be included in benefit-cost analyses. We also address common concerns about whether the inclusion of co-benefits is problematic because of alternative regulatory approaches that may be more cost-effective and the possibility for double counting.


Aldy, Joseph, Matthew Kotchen, Mary Evans, Meredith Fowlie, Arik Levinson, and Karen Palmer. “The Role of Retrospective Analysis in an Era of Deregulation: Lessons from US Mercury and Air Toxics Standards.” Review of Environmental Economics and Policy, vol. 15, no. 1, 2021, pp. 163-168.

Abstract: As of late 2020, the Trump administration had initiated almost 100 rollbacks of US environmental regulations. A careful assessment of the benefits and costs of rolling back an existing regulation can and should inform such decisions. When assessing the potential rollback of an existing regulation, analysts can often learn from the regulation’s implementation through retrospective analysis as well as from advances in scientific knowledge. We discuss recent actions concerning the Mercury and Air Toxics Standards (MATS) to illustrate the potential lessons from doing so. In the case of MATS, advances in science have shed light on broader exposure pathways and previously unquantified health effects, suggesting that the benefits of reducing mercury emissions may exceed previous estimates. At the same time, changes in the energy sector have altered the mix of fuels used to produce electricity, which impacts both the benefits and the costs of the regulation.


Blundell, Wesley, Mary F. Evans, and Sarah L. Stafford. “Regulating Hazardous Wastes Under U.S. Environmental Federalism: The Role of State Resources.” Journal of Environmental Economics and Management, vol. 108, 2021, 102464.

Abstract: We explore the extent to which variation in states’ resources devoted to environmental protection leads to variation in environmental outcomes, specifically the monitoring and enforcement of large hazardous waste facilities regulated under the Resource Conservation and Recovery Act (RCRA). Results from our instrumental variables regressions suggest that the average state responds to a reduction in its per-facility environmental agency budget by decreasing the fraction of large RCRA facilities receiving inspections and enforcement actions. We also find evidence that a reduction in a state’s environmental budget may result in a substitution away from resource-intensive on-site inspections to lower-cost off-site inspections. If the latter type of inspection is relatively less effective in detecting violations, then this substitution is likely to lead to poorer environmental outcomes. Overall our results suggest that decreases in EPA funding for state environmental agencies and further devolution of responsibility for environmental programs to states may result in lower levels of environmental protection in some areas.

Fernholz, Ricardo T. and Christoffer Koch. “The Rise of Big U.S. Banks and the Fall of Big European Banks: A Statistical Decomposition.” European Economic Review, vol. 135, 2021, 103723.

Abstract: Bank asset concentration has risen in the U.S. since the 1980s and declined in Europe since 2008. We decompose this rise and fall of big banks using rank-based empirical methods that characterize dynamic power law distributions into two shaping factors: the growth rates and idiosyncratic volatilities of assets for different size-ranked banks. Higher relative growth rates for the largest U.S. banks led to greater asset concentration. Idiosyncratic volatilities for U.S. banks declined, resulting in lower fundamental volatility of bank assets—the aggregate volatility due to idiosyncratic, bank-specific shocks—despite the rise in concentration since the 1990s. In contrast, the relative growth rates for the largest European banks declined and this led to the lower concentration of European bank assets. Over this same time period, the idiosyncratic volatilities and fundamental volatility of European bank assets have been stable.

Abernathy, John, Andrew R. Finley, Eric T. Rapley, and James Stekelberg. “External Auditor Responses to Tax Risk.” Journal of Accounting, Auditing, and Finance, vol. 36, issue 3, 2021, pp. 489-516.

Abstract: Both practitioners and academics are increasingly focusing their attention on the riskiness of firms’ tax planning activities. In this study, we examine how external auditors respond to tax risk, measured using the volatility of firms’ annual cash and GAAP (Generally Accepted Accounting Principles) effective tax rates. Consistent with the notion that tax risk represents a source of engagement risk that is priced by external auditors, we first document a positive association between audit fees and tax risk incremental to fee premiums arising from tax aggressiveness. We also find that knowledge spillover benefits related to the provision of tax nonaudit services moderate this positive association. In supplemental tests, we provide evidence on additional auditor responses to tax risk. In particular, we document that tax risk is positively associated with both audit report lag and the likelihood of the auditor reporting a tax-related material weakness in the client’s internal controls. Our findings add to the growing literature at the intersection of corporate taxation and auditing, and to the literature distinguishing between the level and riskiness of firms’ tax avoidance strategies.


Finley, Andrew R., Curtis. M. Hall, Erica Harris, and Stephen J. Lusch. “The Effect of Large Corporate Donors on Nonprofit Performance.” Journal of Business Ethics, vol. 172, issue 3, 2021, pp. 463-485.

Abstract: Using a dataset of corporate philanthropic gifts of $1 million or more, we examine the influence of corporate donors on the performance of recipient nonprofit organizations (NPOs). We find that corporate donors positively influence NPO performance, specifically in the form of higher revenues per employee, program ratios, and fundraising returns. We find little evidence that large foundation or individual donors similarly enhance organizational performance. In additional analysis, we find that large corporate donations matter when the corporation is more likely to have influence over the recipient NPO. These findings suggest that corporate donors provide the monitoring and expertise needed to enhance organizational performance beyond simply providing funding to NPOs. Our results are robust to a two-stage model and propensity score matching to address endogeneity concerns. While prior research has examined the effect of corporate philanthropy on donor organization performance, we contribute to the literature by examining whether corporate philanthropy also improves recipient organization performance.

Flory, Jeffrey A., Andreas Leibbrandt, Christina Rott, and Olga Stoddard. “Increasing Workplace Wiversity: Evidence from a Recruiting Experiment at a Fortune 500 Company.” Journal of Human Resources, vol. 56, 2021, pp. 73-92.

Abstract: While many firms have set ambitious goals to increase diversity in their ranks, there is a dearth of empirical evidence on effective ways to reach them. We use a natural field experiment to test several hypotheses on effective means to attract minority candidates for top professional careers. By randomly varying the content in recruiting materials of a major financial services corporation with over 10,000 employees, we find that signaling explicit interest in employee diversity more than doubles the interest in openings among racial minority candidates, the likelihood that they apply and are selected. Impacts on gender diversity are less sharp, and generally not significant.

Garín, Julio, William D. Lastrapes, and Robert Lester. “On the Welfare Effects of Phasing Out Paper Currency.” European Economic Review, vol. 137, 2021, 103780.

Abstract: We quantify the welfare effects of cash suppression policies within a general equilibrium model where cash reduces transactions costs and aids tax evasion in underground markets. In the model, currency suppression increases transactions costs and raises effective tax rates, but shifts resources out of costly underground markets and relaxes the government budget. When coupled with a reduction in distortionary taxes on consumption or factor inputs to ensure budget neutrality, cash suppression policies increase welfare in our baseline representative agent model. In a model with individual heterogeneity in cash use, suppression increases welfare for all, but by less for cash-intensive users.

Gelman, Michael. “What Drives Heterogeneity in the Marginal Propensity to Consume? Temporary Shocks vs Persistent Characteristics.” Journal of Monetary Economics, vol. 117, 2021, pp. 521-542.

Abstract: Many empirical studies show that cash on hand is the most important source of variation in explaining heterogeneity in the marginal propensity to consume (MPC). To explain this, one class of models focuses on the role of heterogeneity in persistent characteristics across individuals while the other class focuses on the role of circumstances within individuals. This paper provides the first empirical measure of the relative importance of circumstances and characteristics in explaining the variance of the MPC. It then maps this empirical measure into a buffer stock model with discount factor heterogeneity to assess how well it explains the data.

Gillen, Benjamin J., Masayoshi Hirota, Ming Hsu, Charles R. Plott, and Brian W. Rogers. “Divergence and Convergence in Scarf Cycle Environments: Experiments and Predictability in the Dynamics of General Equilibrium Systems.” Economic Theory, vol. 71, 2021, pp. 1033-1084.

Abstract: Previous experimental work demonstrates the power of classical theories of economic dynamics to accurately characterize equilibration in multiple market systems. Building on the literature, this study examines the behavior of experimental continuous double auction markets in convergence-challenging environments identified by Scarf (Int Econ Rev 1:157-171, 1960) and Hirota (Int Econ Rev 22:461-467, 1981). The experiments provide insight into two important economic questions: (a) Do markets necessarily converge to a unique interior equilibrium? and (b) which model, among a set of classical specifications, most accurately characterizes observed price dynamics? We observe excess demand-driven prices spiraling outwardly away from the interior equilibrium prices as predicted by the theory of disequilibrium price dynamics. We estimate a structural model establishing that partial equilibrium dynamics characterize price changes even in an unstable general equilibrium environment. We observe linkages between excess demand in one market and price changes in another market, but the sign of expected price change in a market does not depend on the magnitude of excess demand in other markets unless disequilibrium is severe.

Grant, Laura E. “Does the Introduction of Ratings Reduce Giving? Evidence From Charities.” Economic Inquiry, vol. 59, issue 3, 2021, pp. 978-995.

Abstract: The largest charity-ratings organization evaluates thousands of charities with combined annual donations of $100 billion. Because charities’ initial rating occurs at different times, in random order, I can estimate how the introduction of the ratings affects giving. Donations decrease by 5%–9%, on average. The pattern is intuitive: Donations to highest-rated (4-star) charities are stable. Yet for each consecutive star lower, donations decrease, with 1-star charities losing 12%–14%. I also impute each charity’s ratings for years before being rated determine the effect of prior information. Annual losses for the rated charities are approximately $2 billion. Several reasons for the losses are discussed including salience of information, donor expectations, and charity visibility.

Helland, Eric, Rebecca Haffajee, and Beau Kilmer. “Government Opioid Litigation: The Extent of Liability.” DePaul Law Review, vol. 70, issue 2, 2021, article 4.

Abstract: Government opioid litigation, which seeks to hold suppliers of opioid analgesic medications accountable for the devastating harms of the opioid crisis that has now claimed over half a million lives, dates back to the early 2000s. The arc of the litigation has largely mimicked that of tobacco, in which individual private tort claims have mostly been replaced by aggregate litigation. However, opioid litigation is unique in many regards, including in the number of cases, diversity of parties and causes of action alleged, and broad scope of liability asserted by plaintiffs. Over 3,300 civil opioid cases have been filed to date, predominantly by state, local and tribal governments. Following a landmark $465 million judgment against Johnson & Johnson in Oklahoma and recent progress in settlement negotiations in the federal multi-district litigation, excitement is building about the prospects of settlements and verdicts worth tens of billions of dollars. Yet the sprawling and all-encompassing nature of the litigation—deriving from not just nonmedical uses of prescription opioids but also from illegally produced opioids (including heroin and synthetic opioids like fentanyl) not supplied by opioid companies—aises new questions. In this article, we trace the evolution of the current opioid crisis across products and leverage this evidence to analyze the extent of defendant liability under commonly alleged causes of action by governments: negligence, RICO, public nuisance and unjust enrichment. We conclude that extending liability to population harms attributable to illegally manufactured and distributed opioids faces challenges under dominant theories and existing evidence. Nevertheless, the scale of harms related to prescription opioid misuse that can potentially be established under prevalent claims remains substantial. The extent of liability ultimately established will be important not only to case outcomes and potential relief afforded in the ongoing opioid litigation, but also in establishing precedent for future litigation relating to products dangerous to the public’s health.


Helland, Eric, Darius Lakdawalla, Anup Malani, and Seth A Seabury. “Unintended Consequences of Products Liability: Evidence from the Pharmaceutical Market.” Journal of Law, Economics and Organization, vol. 36, issue 3, 2020, pp. 598-632. [Not celebrated in previous year]

Abstract: We explain a surprising effect of tort liability in the market for prescription drugs. Greater punitive damage risk seems to increase prescription drug utilization in states without non-economic damage caps but decrease utilization in states with such caps. We offer an explanation for this puzzle. The vertical production process for drugs involves national upstream producers (drug companies) and local downstream producers (doctors). When a single state reallocates liability from downstream to upstream producers, national drug companies see little reason to alter their nationwide output decisions, but local physicians have incentives to increase their prescriptions in that state. The net result is higher local output. We show how this dynamic can explain our puzzle by demonstrating that punitive damages shift liability upstream from doctors to drug companies, but not when non-economic damages caps limit physician malpractice liability. We provide evidence explaining when, how, and why this type of liability shifting occurs (JEL K13, I11, I18).


Shetreet, Shimon, Hiram Chodosh, and Eric Helland, editors. Challenged Justice: In Pursuit Of Judicial Independence. Brill, 2021

Abstract: Challenged Justice: In Pursuit of Judicial Independence is an academic continuation of the previous volumes on judicial Independence edited by Shimon Shetreet, with others: Jules Deschenes, Christopher Forsyth, and Wayne McCormack. All books were published by Brill Nijhoff: Judicial Independence: The Contemporary Debate (1985), The Culture of Judicial Independence: Conceptual Foundations and Practical Challenges (2012), The Culture of Judicial Independence: Rule of Law and World Peace (2014) and The Culture of Judicial Independence in a Globalised World (2016).

Keil, Manfred, and Sarah Chen*. “Things to be Thankful for in 2021.” San Bernardino Sun, December 28, 2021.

Abstract: Bi-weekly Invited Column. Instead of stressing negative news, which is typical for the popular press, the article focuses on positive economic and social developments for 2021.


Keil, Manfred, and Lauren Kula*. “The Inland Empire Strikes Back with Its Economic Recovery.” San Bernardino Sun, September 9, 2021.

Abstract: Bi-Weekly Invited Column. Due to its reliance on logistics (warehousing, transportation, wholesale trade), the Inland Empire has suffered a milder recession than the state and the Greater Los Angeles area. This reverses the usual business cycle pattern of ‘first in, last out.’


Keil, Manfred, and Sasha Rothstein*. “Our Post-Pandemic Economy has some ‘Squid Game’ Commonalities.” San Bernardino Sun, November 4, 2021.

Abstract: Bi-Weekly Invited Column. The article argues that different from others such as the UC Riverside forecasting center and Beacon Economics, this business cycle is not V-shaped. Instead the steep decline was followed by the second slowest economic recovery measured by employment, and only the Great Recession took longer for employment to recover to pre-pandemic levels.


External Grant: Keil, Manfred, Chief Economist and Lead Study Author. “California Competitiveness.” Los Angeles Chamber of Commerce/Bank of America, 2021, $180,000.

Abstract: The grant was given to the Inland Empire Economic Partnership of which I am the Chief Economist and Lead Author of the study. The task is to investigate why California is losing people and firms to other states, in particular to Texas. This follows the exodus of Tesla, Oracle, Toyota, etc. headquarters.

Lindo, Jason M., and Jessamyn Schaller. “Economic Determinants of Child Maltreatment.” Encyclopedia of Law and Economics, 2nd edition, edited by Alain Marciano and Giovanni Battista Ramello. Springer, 2021.

Abstract: This entry examines the economic determinants of child maltreatment. We first discuss potential mechanisms through which economic factors, including income, employment, aggregate economic conditions, and welfare receipt, might have causal effects on the rates of child abuse and neglect. We then outline the main challenges faced by researchers attempting to identify these causal effects, emphasizing the importance of data limitations and potential confounding factors at both the individual and aggregate levels. We describe two approaches used in the existing literature to address these challenges—the use of experimental variation to identify the effects of changes in family income on individual likelihood of maltreatment, and the use of area studies to identify the effects of changes in local economic conditions on aggregate rates of maltreatment.


Schaller, Jessamyn and Chase S. Eck. “Family Support in Hard Times: Dynamics of Intergenerational Exchange after Adverse Events.” National Bureau of Economic Research, 2021, 28295.

Abstract: We use an event-study approach to examine changes in intergenerational financial transfers and informal care within families following wealth loss, job exit, widowhood, and health shocks. We find sharp reductions in parental giving to adult children following negative shocks to parents’ wealth and earned income, particularly in low-wealth households. Parental giving also decreases with some health shocks and increases following spousal death. Meanwhile, children of low-wealth households increase financial transfers to their parents following adverse shocks and children in both high- and low-wealth households increase their provision of informal care to parents following a wide range of adverse shocks.

Hisam Sabouni and Cameron Shelton. “State Legislative Redistricting: The Effectiveness of Traditional Districting Principles in the 2010 Wave.” Election Law Journal, vol. 20, no. 2, 2021, pp. 198-214.

Abstract: Advocates of redistricting reform believe that traditional districting principles (TDPs) were ineffective in constraining partisan gerrymanders during the 2010 redistricting wave. Yet in the wake of League of Women Voters v. Commonwealth of Pennsylvania (2018), many reformers believe the path forward consists of properly quantifying TDPs and demonstrating their violation by partisan gerrymanders. This is a viable path only insofar as TDPs materially constrain the ability of parties to design a map that delivers a seats-votes curve biased in their favor. If not, then enforcement of TDPs may change the configuration of districts without hindering partisan bias. To test whether TDPs constrain partisan gerrymanders, we analyze a complete set of state legislative maps from the 2010 redistricting wave. We measure manipulation by a low degree of overlap between parent and offspring districts which we confirm is connected to the search for partisan gain. We also examine the extent to which the effects of TDPs tend to be concentrated within few districts or spread across many districts. We find that certain legal principles—chief among them respect for communities of interest--raise overlap, possibly by limiting adjustments for partisan gain.

Kalcheva, Ivalina, Janet Kiholm Smith, and Richard L. Smith. “Institutional Investment and the Changing Role of Public equity Markets: International Evidence.” Journal of Corporate Finance, vol. 64, 2020, 101705. [Not celebrated in previous year]

Abstract: Using country-level data, we study the relation between institutionalization of capital and various measures of reliance on public equity markets. For developed and developing countries, assets under institutional management (mutual funds, pension funds, and insurance companies) are negatively related to the number of listed companies, market capitalization, and trading volume. The negative relationships are estimated on the margin, as other factors, such as GDP, have countervailing positive partial effects and are generally stronger for more highly developed countries. Results indicate that as direct ownership of equity by retail investors is displaced by investing through institutions, financial systems become less public-market-centric.

Anbil, Sriya, and Angela Vossmeyer. “Liquidity from Two Lending Facilities.” Journal of Financial Intermediation, vol. 48, 2021, 100884.

Abstract: We examine how the threat of disclosure (stigma) changes the quality of banks that approach emergency lending facilities. We study a financial crisis where two confidential facilities were available to banks. Unexpectedly, a partial list of bank names from one facility was published, suddenly stigmatizing that facility. We find that the composition of banks that approached each facility changed, where the newly stigmatized facility attracted weaker banks that maintained smaller liquidity buffers, while the alternative confidential facility attracted both weaker and stronger banks. Our results shed light on how stigma prevents regulators from reaching many banks to inject critical liquidity into the banking sector during a crisis.

Lei, Jin, Jiaping Qiu, Chi Wan, and Fan Yu. “Credit Risk Spillovers and Cash Holdings.” Journal of Corporate Finance, vol. 68, 2021, 101965.

Abstract: This paper examines how credit risk spillovers affect corporate financial flexibility. We construct separate empirical proxies to disentangle the two channels of credit risk spillovers—credit risk contagion (CRC), where one firm’s default increases the distress likelihood of another; and product market rivalry (PMR), where the same default strengthens the position of a competitor. We show that firms facing greater CRC have weaker subsequent operating performance and must contend with less favorable bank loan terms. Meanwhile, they accumulate more cash by issuing equity, selling assets, and reducing investment and payout. In contrast, PMR generally has opposite, albeit weaker, effects. Our findings suggest that credit risk spillovers, especially CRC, play an important role in corporate liquidity management.


Liu, Xiaolei, Yuanzhen Lyu, and Fan Yu. “Local Government Implicit Debt and the Pricing of Chengtou Bonds.” Journal of Financial Research, vol. 498, issue 12, 2021, pp. 170-188.

Abstract: Lacking the authority to raise debt on their own, Chinese local governments set up financing vehicles for urban construction and investment to issue the so-called chengtou bonds. While these bonds are commonly understood to carry implicit government guarantee, the identity of the guarantor is rather unclear. By analyzing the yield spread on chengtou bonds, we find that investors began paying attention to city-level fiscal conditions after the well-publicized chengtou debt crisis of 2011. More recently, provincial fiscal conditions became important determinants of chengtou yield spreads as the provinces are allowed to issue municipal bonds to backstop the exploding LGFV debt.