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Blockchain technology was developed as the technological underpinning of the first cryptocurrency, Bitcoin. Since then, the field of finance has been leading its adoption. In this chapter, we analyze recent developments in this process. We describe emerging applications, review the academic literature on the subject, and propose research questions that may interest academics, practitioners, and regulators. We review the issuance of crypto-assets. We start with cryptocurrencies (and their impact on monetary policy), move to initial coin offerings, and finally discuss the issuance of other crypto-assets that are backed by a wide range of underlying assets. We then analyze the post-issuance behavior of these crypto-assets. We explore market integrity, market efficiency, and market microstructure issues. Lastly, we consider the token economy with a special interest in the theory of the firm and industrial organization.

The risk of customers affects corporate financial policy by limiting the ability of firms to securitize customer receivables. We find that firms with riskier receivables, based on the credit risk and diversification of the firms' principal customers, have lower financing capacity and lower leverage in their asset-backed securitizations. Because securitizations are designed to create a very safe claim by separating the risk of the securitized assets from the risk of the originating firms, increases in the risk of the receivables directly inhibit originating firms' ability to securitize assets and indirectly inhibit the originating firms' access to external finance. The study highlights a novel link between the financing of supplier firms and the financial health of their customers and shows how an increase in risk can limit access to external capital.

Models of political risk predict that increases in political uncertainty cause stock prices to fall, especially for politically sensitive firms. We use the event of the Bo Xilai political scandal in 2012 in China as an exogenous shock to identify the impact of political uncertainty on asset prices. We document that the Bo scandal caused a significant drop in stock prices, especially for firms that are more politically sensitive. Further analysis shows that the stock price drop is mainly driven by a change in discount rate, providing strong support for the existence of priced political risk.

The neoclassical theory of investment implies that expected stock returns are tied with the expected marginal benefit of investment divided by the marginal cost of investment. Winners have higher expected growth and expected marginal productivity (two major components of the marginal benefit of investment), and earn higher expected stock returns than losers. The investment model succeeds in capturing average momentum profits, reversal of momentum in long horizons, long-run risks in momentum, and the interaction of momentum with several firm characteristics. However, the model fails to reproduce the procyclicality of momentum as well as its negative interaction with book-to-market equity.

Contrary to recent accounts of off-balance-sheet securitization by financial firms, we show that asset securitization by nonfinancial firms provides a valuable form of financing for shareholders without harming debtholders. Using data from firms� SEC filings, we find that securitization is attractive to firms in the middle of the credit quality distribution, which are the firms with the most to gain. Upon initiation, firms experience positive abnormal stock returns and zero abnormal bond returns, and largely use the securitization proceeds to repay existing debt. Securitization minimizes financing costs by reducing expected bankruptcy costs and providing access to segmented credit markets.

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.

We derive and test q‐theory implications for cross‐sectional stock returns. Under constant returns to scale, stock returns equal levered investment returns, which are tied directly to firm characteristics. When we use generalized method of moments to match average levered investment returns to average observed stock returns, the model captures the average stock returns of portfolios sorted by earnings surprises, book‐to‐market equity, and capital investment. When we try to match expected returns and return variances simultaneously, the variances predicted in the model are largely comparable to those observed in the data. However, the resulting expected return errors are large.

Historical market-to-book has been shown to explain current leverage. Prior studies attribute the evidence to market timing. This study shows that with the presence of time-varying targets and adjustment costs, historical market-to-book has a significant impact on leverage even when firms do not time the market. The historical values of alternative market timing proxies, such as insider sales and the market sentiment index, are shown to have no effects on leverage while the historical values of alternative growth-option proxies do have effects. Overall, the evidence is largely consistent with a partial adjustment model of leverage.

Recent winners have temporarily higher loadings than recent losers on the growth rate of industrial production. The loading spread derives mostly from the positive loadings of winners. The growth rate of industrial production is a priced risk factor in standard asset pricing tests. In many specifications, this macroeconomic risk factor explains more than half of momentum profits. We conclude that risk plays an important role in driving momentum profits. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org., Oxford University Press.

We investigate the impacts of real estate price changes on firms’ investment and financing using detailed real estate transaction data in China. China witnessed the real estate prices rise for more than a decade and recent "housing purchase restriction" policies enforced in 46 cities generated negative price shocks. Using both IV and DID approaches, we document that the rising real estate price causes land-holding firms to borrow more and invest more while the policy shocks work in the opposite direction. Further decomposition of investment into land and non-land investments shows that the rising real estate prices cause firms to only increase investment in land, especially commercial land, while decrease non-land investment. We next focus on a sub-sample of non-land owners and show that these firms borrow less and invest less if they are affected more by real estate price rise and the effects are reversed due to policy shocks. The results are consistent with the existence of a crowding-out effect. First, rising real estate price fosters more investment into the real estate sectors, which crowds out non-real estate investment. Second, rising real estate price enlarges the financial constraint gaps between firms with land and firms without land, which cause resource misallocation. To understand the aggregate effect, we investigate investment efficiency changes. We show that the increased investment associated with land price rises in fact reduces investment efficiency while policy shocks improve investment efficiency. The evidence showing that net effect would be negative calls for caution in the policy debate that advocates for investment stimulation through real estate boom.

Contrary to recent accounts of off-balance sheet securitization by financial firms, we show that asset securitization by nonfinancial firms provides a valuable form of financing to shareholders without harming firms’ debtholders. Using data from firms’ SEC filings, we find that securitization is attractive to firms in the middle of the credit quality distribution, which are the firms with the most to gain. Upon initiation, firms experience positive abnormal stock returns, zero abnormal bond returns, and largely use the securitization proceeds to repay existing debt. Securitization helps minimize financing costs by reducing expected bankruptcy costs and providing access to segmented credit markets.

The relation between a rm’s stock return and its intangible investment ratio and asset tangibility is derived under the intangible-asset-augemnted (IAA) q-theory framework. The structural estimation of the model leads to three main results. First, the IAA q-theory captures the value premium and the relation between R&D intensity and stock returns significantly better than the conventional q-theory. Two features of intangible assets, adjustment costs and investment-specic-technologicalchange, are crucial to the improved model performance. Second, the relation between R&D intensity and stock return is similar to the relation between tangible investment and stock return, which is dierent from what the previous literature documents. Third, the IAA q-theory gives a more reasonable estimate of adjustment costs of tangible investments than the conventional q-theory does. Moreover, the magnitude of adjustment costs of intangible investments is estimated to be larger than that of tangible investments.

The stakeholder theory of capital structure proposed by Titman (1984) argues that firms will take into account the nonfinancial stakeholders’ preferences when making capital structure decisions. In particular, firms selling specialized products will choose a lower leverage ratio. We propose a cost structure measure to capture the uniqueness of products. We document that this single factor can explain about 16 to 23% of the cross-sectional variation in capital structure. A one standard deviation increase in the cost structure variable relates to an 8 to 10% decrease in the debt ratio. The association is stronger among firms with a higher expected default probability. The results are robust to using the instrumental variable (IV) method. We further discuss three underlying mechanisms: customers’ channel, suppliers’ channel and employees’ channel, through which the cost structure variable captures stakeholders’ concerns. We conclude that, consistent with the stakeholder theory, cost structure has a causal impact on a firm’s leverage choices and is one of the most important determinants of capital structure in the cross-section.

Optimal investment of firms implies that expected stock returns are tied with the expected marginal benefit of investment divided by the marginal cost of investment. Winners have higher expected growth and expected marginal productivity (two major components of the marginal benefit of investment), and earn higher expected stock returns than losers. The investment model succeeds in capturing average momentum profits, reversal of momentum in long horizons, as well as the interaction of momentum with market capitalization, firm age, trading volume, and stock return volatility. However, the model fails to reproduce procyclical momentum profits.

Optimal investment of firms implies that expected stock returns are tied with the expected marginal benefit of investment divided by the marginal cost of investment. Winners have higher expected growth and expected marginal productivity (two major components of the marginal benefit of investment), and earn higher expected stock returns than losers. The investment model succeeds in capturing average momentum profits, reversal of momentum in long horizons, as well as the interaction of momentum with market capitalization, firm age, trading volume, and stock return volatility. However, the model fails to reproduce procyclical momentum profits.

We investigate the determinants and consequences of the use of asset-backed securitizations (ABS) by industrial firms. ABS users are larger, more highly levered, have more securitizable assets, and greater differences in risk between their securitized and non-securitized assets compared to other firms. Debt levels in the Special purpose vehicles associated with the ABS transactions are inversely related to the risk of the assets transferred to the Special Purpose Entity (SPE), but are unrelated to the characteristics of the originators. Upon initiating an ABS program, firms experience an increase in asst return volatility, a decrease in bond rating, and increase in their total leverage (including the leverage associated with ABS). ABS users also experience an increase in their bond and loan spreads on new borrowing post-ABS initiation, while there is no change in the yield spread on existing debt. ABS spreads are much lower than bond spreads, and the overall cost of debt financing remains constant. Overall, our results are consistent with firms using ABS financing as a substitute for traditional debt financing to lower their overall financing costs. Finally, we find that SPE leverage is lower when the SPE is consolidated on the firm’s balance sheet and after 2000, consistent with changes in the accounting treatment of these transactions that have made it more difficult to treat ABS as off-balance-sheet financing. This finding suggests that firms also care about accounting reporting in determining whether to use ABS financing.

Historical market-to-book and past returns have been shown to explain current leverage. Prior studies attribute the evidence to market timing or passive management. This study shows that with the presence of time-varying targets and adjustment costs, historical variables have a significant impact on leverage even when firms do not time the market and managers actively rebalance the leverage ratios toward the targets. The historical value of alternative market timing proxies, such as insider sales and market sentiment, are shown to have no effects on leverage while the historical value of alternative growth options proxies do. Overall, the evidence is largely consistent with a partial adjustment model of leverage.

This study investigates the different roles played by two components of trading volume, informed-trading and liquidity-trading, in the volatility-volume relation at the aggregate level. Using transaction data and an extended trading model of Easley, Kiefer, O'Hara and Paperman (1996), I estimate a marketwide private information arrival rate (PIAR) variable and use it to control for the informed trading component in trading volume. Contrary to the belief that aggregate trading volume mainly represents liquidity trading, the results show that the marketwide-private-information-trading component in aggregate trading volume is the underlying driving force for the positive volatility-volume relation.

We document that media coverage before the IPO day significantly relates to IPO underpricing. The relation is asymmetrical: more media articles are associated with more underpricing when the offer price is revised upwards from the midpoint of the initial filing range, while there is no significant relationship between media coverage and underpricing when the offer price is revised downward. Conditioning on positive price revision, one extra piece of media coverage is associated with about two percentage points greater underpricing. The positive relationship between media coverage and underpricing is stronger when ex ante uncertainty is greater. We fail to find any relation between positive media coverage and IPO firms' long run under-performance. Overall, our findings are consistent with theories of underpricing being driven by the need to compensate investors for information acquisition, but are not consistent with investor sentiment or prospect theory explanations. Moreover, we find that recent stock market returns have significant explanatory power when media attention is omitted from the regressions but lose most or all of their significance when media attention is included, raising new questions in the debate over partial adjustment to public information for IPOs.

Recent winners have temporarily higher loadings than recent losers on the growth rate of industrial production. The loading spread derives mostly from the positive loadings of winners. The growth rate of industrial production is a priced risk factor in standard asset pricing tests. In many specifications, this macroeconomic risk factor explains more than half of momentum profits. We conclude that risk plays an important role in driving momentum profits.

Previous work shows that the growth rate of industrial production is a common macroeconomic risk factor in the cross-section of expected returns. We demonstrate the connection between momentum profits and shifts in factor loadings on this macroeconomic variable. Winners have temporarily higher loadings on the growth rate of industrial production than losers. The loading dispersion derives mostly from the high, positive loadings of winners. Depending on model specification, this loading dispersion can explain up to 40% of momentum profits.

We study empirically the changes in economic fundamentals for firms with recent stock price momentum. We find that: (i) winners have temporarily higher dividend, investment, and sales growth rates, and losers have temporarily lower dividend, investment, and sales growth rates; (ii) the duration of the growth rate dispersion matches approximately that of the momentum profits; (iii) past returns are strong, positive predictors of future growth rates; and (iv) factor-mimicking portfolios on expected growth rates earn significantly positive returns on average. This evidence is consistent with the theoretical predictions of Johnson (2002), in which momentum returns reflect compensation for temporary shifts in risk associated with expected growth. Additional tests do not provide much support for a risk-based explanation, however.