Puerto Rico’s unique characteristics as a U.S. territory allow us to examine the channels through which (sub)sovereign default risk can have real effects on the macroeconomy. Post-2012, during the period of increased default probabilities, the cointegrating relationship between real activity in Puerto Rico and the U.S. mainland breaks down and Puerto Rico spirals into a significant decline. We exploit the cross-industry variation in default risk exposure to identify the impact of changes in default risk on employment. The evidence suggests that there are significantly higher employment growth declines in government demand and external finance dependent industries. An additional real effect of default anticipation is that heightened default risk Granger causes Puerto Rico’s austerity measures. An event study analysis using government bond yields and stock returns confirms that news of increased default risk increases the cost of capital for the Puerto Rican government and for publicly traded Puerto Rican firms.
Although the non-financial corporate sector accounts for the lion’s share of the post-Global Financial Crisis surge in emerging-market leverage, there is little systematic research on factors that impact corporate distress risk in emerging markets. Existing bankruptcy risk models developed using US data have low predictive power when applied to emerging market firms. We suggest that these models do not account for emerging market vulnerabilities to global shocks such as advanced economy monetary policy changes, US dollar movements, or shifts in global liquidity and risk-aversion.
This chapter investigates the pricing of key contract provisions of Puerto Rican debt. In doing so, the chapter contributes to a body of research that asks the questions: do investors price contract provisions? Does the pricing of contract provisions vary with credit risk? To our knowledge, this is the first study to address these questions for the case of Puerto Rico or any municipal issuer. Puerto Rico’s unique status as a U.S. territory implies that its subsidiaries, such as municipalities, cannot file for bankruptcy under Chapter 9 of the U.S. Bankruptcy Code.
We explore the impact of Knightian uncertainty on contracting within a multi-layered firm. We study a setting where, absent uncertainty, division managers should be paid based on their division performance, but not other divisions' performance.
We examine the implications of less powerful forward guidance for optimal policy using a sticky-price model with an effective lower bound (ELB) on nominal interest rates as well as a discounted Euler equation and Phillips curve. We find that, under a wide range of plausible degrees of discounting, it is optimal for the central bank to compensate for the reduced effect of a future rate cut by keeping the policy rate at the ELB for longer.
Using a large database of U.S. equity position-level holdings for hedge funds, we measure the degree of securitylevel crowdedness. The crowdedness factor is related to downside “tail risk" as stocks with higher exposure to crowdedness experience relatively larger drawdowns during periods of market distress. This tail risk extends to hedge fund portfolio returns as the crowdedness factor explains why some funds experience relatively large drawdowns.
In this study, we ask if it is desirable to give greater freedom to firms in their choices of class shares. Making use of the 2011 Commercial Act amendment that significantly relaxed the regulation on class shares in Korea, we study the motivation and the effect of adopting two newly emerged class shares.
In many service operations, customers have repeated interactions with service providers. This creates two important questions for service design. First, how important is it to maintain the continuity of service for individuals? Second, since maintaining continuity is costly and, at times, operationally impractical for both the organization (due to potentially lower utilization) and providers (due to high effort required), should certain customer types, such as those with complex needs, be prioritized for continuity?
Backhanded compliments seem like praise but can leave a sting. This study explores the psychology of backhanded compliments. Flatterers deploy backhanded compliments to garner liking while conveying social status. Recipients view praise of this kind as strategic put-downs and penalize would-be flatterers even as the backhanded compliment undermines their motivation and perseverance.
We examine how product market competition affects the disclosure of innovation. Theory posits that product market competition can cause firms to increase their disclosure of innovation to deter competitors. Consistent with this reasoning, we find that patent applicants in more competitive industries voluntarily accelerate their patent disclosures, which are credibly disclosed via the United States Patent and Trademark Office.
Why are downturns following high valuations of firms long and severe? Why do firms choose high debt when they anticipate high valuations, and underperform subsequently? We propose a theory of financing cycles where the importance of creditors’ control rights over cash flows (“pledgeability”) varies with industry liquidity.
I develop a theory of credit relationships in an economy subject to search frictions and limited enforceability. The model features a dynamic contracting problem embedded within a directed search equilibrium with aggregate and creditor-specific uncertainty.
We examine the effect of higher wages on firm performance during the 2008 financial crisis. To identify variation in wages, we rely on heterogeneity in the timing of long-term wage agreements for a sample of UK firms. We instrument for firms signing long-term agreements overlapping with the crisis by the presence of a contract signed in 2006 or earlier and expiring before September 2008.
Competition between firms to invent and patent an idea, or “patent racing,” has been much discussed in theory, but seldom analyzed empirically. This article introduces an empirical way to identify patent races, and provides the first broad-based view of them in the real world.
Using a novel data set from 75 stores of a department store retail chain that changed its incentive plan for store managers to spur greater cooperation among them and with the corporate office, we examine how incentives impact operational decisions and, consequently, store outcomes.
Private labels (PLs) represent a major opportunity for retailers, and a severe threat to brand manufacturers. However, considerable heterogeneity can be observed in PL growth rates across markets, creating ambiguity about their future growth potential. This poses a formidable challenge to both brands and retailers on how to allocate resources across different markets to prepare for the future.
On average, competing retailers near Lidl stores set their prices approximately 9.3% lower than in markets where Lidl is not present, which is more than three times as much as was typically reported in other academic work on Walmart’s entry in a new market. This price reaction results, on average, in substantial dollar savings for customers.
Hart (2011) argues that the Aumann and Serrano (2008) and Foster and Hart (2009) measures of riskiness have an objective and universal appeal with respect to a subset of expected utility preferences, UH. We show that mean-riskiness decision-making criteria using either measure violate expected utility and are generally inconsistent with optimal portfolio choices made by investors with preferences in UH.
Scholars have long been interested in new industry emergence, highlighting that it could often be impeded by uncertainty across four dimensions: technology, demand, ecosystem, and institutions. Building on the insight that uncertainty stems from partial knowledge, we develop a conceptual framework that utilizes a temporal and a process perspective for knowledge generation and aggregation.
E-commerce platforms, such as Amazon, Alibaba and Flipkart, that match sellers and consumers at an unprecedented scale, operate their internal search engines to help buyers find relevant products from a large number of sellers, and also allow sellers to advertise to consumers for positions in the search listing. Determining an optimal ranking of products in response to a search query is a challenging problem for the platform because sellers have certain private information about their products that the platform does not have. Using a theoretical model, we show that sellers’ bids in ad auctions, through which sponsored slots are typically allocated, can reveal (some of) this private information to the platform (“information effect”), which it can optimally combine with information that it has about consumers to improve the placement of organic results, a practice we call “strategic listing”.