We study the allocation and compensation of human capital in the U.S. finance industry over the past century. Across time, space, and subsectors, we find that financial deregulation is associated ...with skill intensity, job complexity, and high wages for finance employees. All three measures are high before 1940 and after 1985, but not in the interim period. Workers in finance earn the same education-adjusted wages as other workers until 1990, but by 2006 the premium is 50% on average. Top executive compensation in finance follows the same pattern and timing, where the premium reaches 250%. Similar results hold for other top earners in finance. Changes in earnings risk can explain about one half of the increase in the average premium; changes in the size distribution of firms can explain about one fifth of the premium for executives.
The finance industry has grown, financial markets have become more liquid, information technology has been revolutionized. But have financial market prices become more informative? We derive a ...welfare-based measure of price informativeness: the predicted variation of future cash flows from current market prices. Since 1960, price informativeness has increased at longer horizons (three to five years). The increase is concentrated among firms with greater institutional ownership and share turnover, firms with options trading, and growth firms. Prices have also become a stronger predictor of investment, and investment a stronger predictor of cash flows. These findings suggest increased revelatory price efficiency.
Abstract
We study an economy’s response to an unexpected epidemic. The spread of the disease can be mitigated by reducing consumption and hours worked in the office. Working from home is subject to ...learning-by-doing. Private agents’ rational incentives are relatively weak and fatalistic. The planner recognizes infection and congestion externalities and implements front-loaded mitigation. Under our calibration, the planner reduces cumulative fatalities by 48$\%$ compared to 24$\%$ by private agents, although with a sharper drop in consumption. Our model can replicate key industry and/or occupational-level patterns and explain how large variations in outcomes across regions can stem from small initial differences.
American markets, once a model for the world, are giving up on competition. Thomas Philippon blames the unchecked efforts of corporate lobbyists. Instead of earning profits by investing and ...innovating, powerful firms use political pressure to secure their advantages. The result is less efficient markets, leading to higher prices and lower wages.
American markets, once a model for the world, are giving up on competition. Thomas Philippon blames the unchecked efforts of corporate lobbyists. Instead of earning profits by investing and ...innovating, powerful firms use political pressure to secure their advantages. The result is less efficient markets, leading to higher prices and lower wages.
Abstract
I analyze efficient government interventions to mitigate financial distress during a severe macroeconomic downturn. At the macroeconomic level, the key variable is the gap between the real ...wage and the shadow cost of labor. This gap is large when unemployment is high. At the micro level, laissez-faire leads to excessive liquidation of businesses but an indiscriminate bailout prevents efficient reallocations and implies a large transfer from taxpayers to existing private creditors. I show that a cost-efficient intervention can be achieved with a continuation premium, whereby the government agrees to reduce its claims by the same haircut as private creditors plus a fixed premium. (JEL D24, G33, G38, H12)
Received November 17, 2020; editorial decision November 23, 2020 by Editor Andrew Ellul.
A quantitative investigation of financial intermediation in the United States over the past 130 years yields the following results: (i) the finance industry's share of gross domestic product (GDP) is ...high in the 1920s, low in the 1960s, and high again after 1980; (ii) most of these variations can be explained by corresponding changes in the quantity of intermediated assets (equity, household and corporate debt, liquidity); (iii) intermediation has constant returns to scale and an annual cost of 1.5-2 percent of intermediated assets; (iv) secular changes in the characteristics of firms and households are quantitatively important.
Financial distress is more likely to happen in bad times. The present value of distress costs therefore depends on risk premia. We estimate this value using risk-adjusted default probabilities ...derived from corporate bond spreads. For a BBB-rated firm, our benchmark calculations show that the NPV of distress is 4.5% of predistress value. In contrast, a valuation that ignores risk premia generates an NPV of 1.4%. We show that marginal distress costs can be as large as the marginal tax benefits of debt derived by Graham (2000). Thus, distress risk premia can help explain why firms appear to use debt conservatively.
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