Viral V. Acharya

The rise of shadow banking and attendant financial fragility in China can be traced to intensified deposit competition following the 2008–2009 global financial crisis (GFC). A large, state-owned bank’s deposits from cross-border money inflows fell significantly following the GFC, and it supported the government’s fiscal stimulus more aggressively than other large banks by issuing larger volumes of new loans. Small and medium-sized banks with more branch-level overlaps with this large bank relied more on shadow banking and issued more wealth management products (WMPs)—short-maturity, off-balance-sheet substitutes for deposits. Greater amounts of WMPs created rollover risks for the issuers, as reflected by higher yields on new WMPs, higher borrowing rates in the interbank market, and lower stock-market performance during liquidity stress. This paper was accepted by Victoria Ivashina, finance. Funding: This work was supported by the National Natural Science Foundation of China [Grants 71272024, 71972051, and 72071117]. Supplemental Material: The internet appendix and data files are available at https://doi.org/10.1287/mnsc.2023.04233 .

One measure of the ex ante cost of disasters is the welfare gain from shortening their expected duration. We introduce a stochastic clock into a standard disaster model that summarizes information about progress (positive or negative) toward disaster resolution. We show that the stock market response to duration news is essentially a sufficient statistic to identify the welfare gain to interventions that alter the state. Using information on clinical trial progress during 2020, we build contemporaneous forecasts of the time to vaccine deployment, which provide a measure of the anticipated length of the COVID-19 pandemic. The model can thus be calibrated from market reactions to vaccine news, which we estimate. The estimates imply that ending the pandemic would have been worth from 5% to 15% of total wealth as the expected duration varied in this period. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.00863 .

We study a model in which a low monetary policy rate lowers the cost of corporate debt, potentially spurring productive investment; low interest rates, however, also induce firms to lever up so as to increase payouts to equity. Whereas such leveraged payouts privately benefit shareholders, leverage comes at the social cost of distorting their incentives, thereby lowering productivity and discouraging investment. If leverage is unregulated (for example, because of the presence of a shadow banking system), then the optimal monetary policy seeks to contain such socially costly leveraged payouts by stimulating investment in response to adverse shocks only up to a level below the first best. The optimal monetary policy may even consist of leaning against the wind, that is, not stimulating the economy at all, in order to fully contain leveraged payouts and maintain productive efficiency. This paper was accepted by Tomasz Piskorski, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01440 .

We study the period of the COVID-19 outbreak to assess the impact of foreign institutional investor (FII) flows on asset prices in an emerging market. In a dataset of stock-level foreign fund flows on Indian equities, we show that stocks experiencing abnormally high innovations in foreign fund flows face a permanent price increase (an “information” effect), whereas stocks experiencing abnormally low (negative) innovations in foreign fund flows suffer a partly transient price decline. During the COVID-19 outbreak, the immediate price effects were exaggerated and followed by higher transient volatility. Our methodology shows the efficacy of stabilization policies, initiated notably by the Federal Reserve, in dampening the relation of foreign fund flows and equity prices in the immediate aftermath of the COVID-19 outbreak.

We suggest a new mechanism—the liquidity insurance channel—based on the widespread reliance of high credit quality firms on bank credit lines for liquidity management. Our model matches the patterns of usage of loans and credit lines in the cross‐section of firms and defines the conditions under which shocks to bank health affect primarily low or high credit quality firms. Our framework can explain why credit line origination is more cyclical than loan origination. Overall, we uncover a novel interaction between bank health and economic activity through the provision of bank credit lines to high credit quality firms.

Why do half of S&P 500 firms have duality, that is, a CEO who is also the Chair of the Board? We show theoretically that duality can play an important role in the competition for CEOs. Empirically, we document that duality changes are concentrated at times when new CEOs are hired and firms are more likely to offer duality to CEOs with greater ability. This finding is robust to different measures of CEO ability and types of succession plans. We also show that the correlation between duality and CEO ability is stronger in industries that feature a greater competition for CEOs.

We address the paradox that financial innovations aimed at risk-sharing appear to have made the world riskier. Financial innovations facilitate hedging idiosyncratic risks among agents; however, aggregate risks can be hedged only with liquid assets. When risk-sharing is primitive, agents self-hedge and hold more liquid assets; this buffers aggregate risks, resulting in few correlated failures compared to when there is greater risk sharing. We apply this insight to build a model of a clearinghouse to show that as risk-sharing improves, aggregate liquidity falls but correlated failures rise. Public liquidity injections, for example, in the form of a lender-of-last-resort can reduce this systemic risk ex post, but induce lower ex-ante levels of private liquidity, which can in turn aggravate welfare costs from such injections.

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