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Germany’s economy is so bad even sausage factories are closingIWHThe Economist, January 15, 2026
We develop an ethical preference-based model that reproduces the average return and volatility spread between sin and non-sin stocks. Our investors do not necessarily boycott sin companies. Rather, they are open to invest in any company while trading off dividends against ethicalness. When dividends and ethicalness are complementary goods and investors are sufficiently risk averse, the model predicts that the dividend share of sin companies exhibits a positive relation with the future return and volatility spreads. An empirical analysis supports the model’s predictions. Taken together, our results point to the importance of ethical preferences for investors’ portfolio choices and asset prices.
Using a comprehensive dataset of corporate lawsuits in China, we investigate the implications of corporate misconduct on the cost of private debt. Evidence reveals that firms involved in litigations obtain subsequent loans with stricter pricing terms, 15.1 percent higher loan spreads, than non-litigated borrowers. Strong political connection and repeated relationship help to flatten the sensitivity of loan pricing to litigation. Nonbank financial institutions react in stronger manner to corporate misconduct than traditional banks in pricing loans. Overall, we show that private debt holders care about borrowers’ wrongdoing in the past.
We study how US chief executive officers (CEOs) invest their deferred compensation plans depending on the firm's profitability. By looking at the correlation between the CEO's return on these plans and the firm's stock return, we show that deferred compensation is to a large extent invested in the company equity in good times and divested from it in bad times. The divestment from company equity in bad times arguably reflects CEOs' incentive to abandon the firm and to invest in alternative instruments to preserve the value of their deferred compensation plans. This result suggests that the incentive alignment effects of deferred compensation crucially depend on the firm's health status.
We use rich microeconomic data on performance and choices of students at college entry to analyze interactions between the selection mechanism, eliciting college preferences through exams, and the allocation mechanism. We set up a framework in which success probabilities and student preferences are shown to be identified from data on their choices and their exam grades under exclusion restrictions and support conditions. The counterfactuals we consider balance the severity of congestion and the quality of the match between schools and students. Moving to deferred acceptance or inverting the timing of choices and exams are shown to increase welfare. Redistribution among students and among schools is also sizeable in all counterfactual experiments.
The purpose of this paper is to examine whether or not the chief executive officers’ (CEO) compensation is affected by the compensation of the outside directors sitting on their board, who are also CEOs of other firms.
We investigate the relationship between Chief Executive Officer (CEO) compensation and firm innovation and find that long‐term incentives in the form of options, especially unvested options, and protection from managerial termination in the form of golden parachutes are positively related to corporate innovation, and particularly to high‐impact, exploratory (new knowledge creation) invention. Conversely, non‐equity pay has a detrimental effect on the input, output and impact of innovation. Tests using the passage of an option expensing regulation (FAS 123R) as an exogenous shock to option compensation suggest a causal interpretation for the link between long‐term pay incentives, patents and citations. Furthermore, we find that the decline in option pay following the implementation of FAS 123R has led to a significant reduction in exploratory innovation and therefore had a detrimental effect on innovation output. Overall, our findings support the idea that compensation contracts that protect from early project failure and incentivize long‐term commitment are more suitable for inducing high‐impact corporate innovation.
This study analyzes the economic consequences of changes in the local bank presence. Using a unique data set of banks, firms and counties in Poland over the period 2009–14, it is shown that changes strengthening the relationship banking model are associated with local labour market improvements and easier small and medium-sized enterprise access to bank debt. However, only the appearance of new, more aggressive owners of large commercial banks stimulates new firm creation.
Most countries in the European Union (EU) delay the transposition of European Commission (EC) directives, which aim at reforming banking supervision, resolution, and deposit insurance. We compile a systematic overview of these delays to investigate if they result from strategic considerations of governments conditional on the state of their financial, regulatory, and political systems. Transposition delays pertaining to the three Banking Union directives differ considerably across the 28 EU members. Bivariate regression analyses suggest that existing national bank regulation and supervision drive delays the most. Political factors are less relevant. These results are qualitatively insensitive to alternative estimation methods and lag structures. Multivariate analyses highlight that well-stocked deposit insurance schemes speed-up the implementation of capital requirements, banking systems with many banks are slower in implementing new bank rescue and resolution rules, and countries with a more intensive sovereign-bank nexus delay the harmonization of EU deposit insurance more.
Do prior lending relationships result in pass‐through savings (lower interest rates) for borrowers, or do they lock in higher costs for borrowers? Theoretical models suggest that when borrowers experience greater information asymmetry, higher switching costs, and limited access to capital markets, they become locked into higher costs from their existing lenders. Firms in Chapter 11 seeking debtor‐in‐possession (DIP) financing often fit this profile. We investigate the presence of lock‐in effects using a sample of 348 DIP loans. We account for endogeneity using the instrument variable (IV) approach and the Heckman selection model and find consistent evidence that prior lending relationship is associated with higher interest costs and the effect is more severe for stronger existing relationships. Our study provides direct evidence that prior lending relationships do create a lock‐in effect under certain circumstances, such as DIP financing.
We show that borrowing firms benefit substantially from important enforcement actions issued on U.S. banks for safety and soundness reasons. Using hand-collected data on such actions from the main three U.S. regulators and syndicated loan deals over the years 1997–2014, we find that enforcement actions decrease the total cost of borrowing by approximately 22 basis points (or $4.6 million interest for the average loan). We attribute our finding to a competition-reputation effect that works over and above the lower risk of punished banks post-enforcement and survives in a number of sensitivity tests. We also find that this effect persists for approximately four years post-enforcement.
