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We study whether carbon emissions affect the cross-section of US stock returns. We find that stocks of firms with higher total carbon dioxide emissions (and changes in emissions) earn higher returns, controlling for size, book-to-market, and other return predictors. We cannot explain this carbon premium through differences in unexpected profitability or other known risk factors. We also find that institutional investors implement exclusionary screening based on direct emission intensity (the ratio of total emissions to sales) in a few salient industries. Overall, our results are consistent with an interpretation that investors are already demanding compensation for their exposure to carbon emission risk.

We outline a simple and robust methodology to align portfolios with a science-based, carbon budget consistent with maintaining a temperature rise below 1.5 °C with 83% probability. We show how to keep the tracking error at a negligible level. This approach works for both passive and active managers. It also establishes an exit roadmap for carbon-intensive corporates, thereby generating a form of competition to decarbonize within each sector. We also discuss four sources of risks: uncertainty around a rapidly shrinking carbon budget, time impacts on decarbonization rates, implementation risk due to market-wide selling pressure, and uncertainty about taxes on polluting companies.

Companies are exposed to carbon-transition risk as the global economy transitions away from fossil fuels to renewable energy. We estimate the market-based premium associated with this transition risk at the firm level in a cross-section of over 14,400 firms in 77 countries. We find a widespread carbon premium—higher stock returns for companies with higher levels of carbon emissions (and higher annual changes)—in all sectors over three continents, Asia, Europe, and North America. Short-term transition risk is greater for firms located in countries with lower economic development, greater reliance on fossil energy, and less inclusive political systems. Long-term transition risk is higher in countries with stricter domestic, but not international, climate policies. However, transition risk cannot be explained by greater exposure to physical (or headline) risk. Yet, raising investor awareness about climate change amplifies the level of transition risk.

This paper outlines a simple and robust methodology for portfolio managers to align their portfolios with the carbon neutrality goals (Net Zero Targets) set out following the Paris Agreement in 2015. The approach is based on dynamically limiting the portfolio carbon footprint so that it satisfies a time-varying, science-based, carbon budget consistent with maintaining an average temperature rise to less than 1.5C. We show how the tracking error of a Net Zero Aligned portfolio with respect to a global market index can be maintained at a negligible level for large portfolios even as they progressively reduce their carbon footprints to remain within their carbon budget.

Despite widespread concern about global climate change, the overwhelming majority of publicly listed companies around the world still do not disclose their carbon emissions. Even fewer privately held companies do. Making carbon disclosures mandatory for both public and private companies is an elementary but essential step in the drive towards a net zero carbon economy. Firms should be required to report their annual direct greenhouse gas emissions, called Scope 1 emissions, as measured in CO2 equivalents, with possible deductions for high quality offsets. Going forward, firms should also be required to report the history of their annual carbon emissions. Such a disclosure mandate is simple, transparent, and readily implemented. It will aid policy makers and asset managers alike in managing the risks of carbon transition and accelerate the pace of future carbon emission reductions.

We study how firm-level carbon emissions affect bank lending and, through this channel, real decisions in a sample of global firms with syndicated loans. Using bank-level commitments to carbon neutrality to measure changes in banks’ green preferences, we show that firms with higher (lower) scope-1 emission levels borrowing from banks making commitments subsequently receive less (more) bank credit, even controlling for differences in their fundamentals. The bank decisions to reallocate credit more likely reflect their preferences for green rather than their differential response to an increased business risk. The reduction in bank lending to a brown sector lowers this sector’s real investments but even then, these firms do not improve their environmental scores.

This paper explores how the carbon premium varies around the world. We estimate the stock return premium associated with carbon emissions at the firm level in a cross-section of over 14,400 firms in 77 countries. We find that there is a widespread carbon premium-higher stock returns for companies with higher carbon emissions-in all sectors over three continents, Asia, Europe, and North America. Stock returns are affected by both direct and indirect emissions through the supply chain. In addition, the carbon premium has been rising in recent years. We also find widespread divestment based on carbon emissions by institutional investors around the world, but institutional investors tend to focus their divestment on foreign companies.

We estimate effects of voluntary and mandatory disclosure of carbon emissions on stock returns and volatility using a large global sample of publicly listed firms. We find that voluntary disclosure of scope 1 emissions by companies results in lower stock returns relative to non-disclosing companies. However, a cost of disclosing emissions is increased divestment by institutional investors. We also find that U.K. mandatory carbon disclosure rules for publicly traded companies resulted in lower stock-level uncertainty. The effect of these mandatory disclosure rules also spilled over into other markets, especially those with close geographic and economic proximity, and companies in the same industry.

We study the impact of foreign institutional investors on price efficiency with firm-level international data. Using additions to the MSCI index and the U.S. Jobs and Growth Tax Relief Reconciliation Act as exogenous shocks to foreign ownership, we show that greater foreign ownership increases stock price informativeness, especially in developed economies. This increase arises from new information that foreign investors bring in and displacement of less-informed domestic retail investors. Finally, we show that foreign ownership, particularly from active investors, increases market liquidity, reduces firms’ cost of equity, and increases firms’ real investment growth.

We study the impact of the zero lower bound interest rate policy on the industrial organization of the U.S. money fund industry. We find that in response to policies that maintain low interest rates, money funds: change their product offerings by investing in riskier asset classes; are more likely to exit the market; and reduce the fees they charge their investors. The consequence of fund closures resulting from interest rate policy is the relocation of resources in affected fund families and in the asset management industry in general, as well as decline in capital of issuers borrowing from money funds.

How to prevent runs on open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds' net asset values to pass on funds' trading costs to transacting shareholders. Using unique data on investor transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces redemptions during stress periods. The stabilizing effect is internalized particularly by institutional investors and investors with longer investment horizons. The positive impact of alternative pricing rules on fund flows reverses in calm periods when costs associated with higher tracking error dominate the pricing effect.

How to prevent runs on open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds' net asset values to pass on funds' trading costs to transacting shareholders. Using unique data on investor transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces redemptions during stress periods. The stabilizing effect is internalized particularly by institutional investors and investors with longer investment horizons. The positive impact of alternative pricing rules on fund flows reverses in calm periods when costs associated with higher tracking error dominate the pricing effect.

We study whether carbon emissions affect the cross-section of U.S. stock returns. We find that stocks of firms with higher total CO2 emissions (and changes in emissions) earn higher returns, controlling for size, book-to-market, and other return predictors. We cannot explain this carbon premium through differences in unexpected profitability or other known risk factors. We also find that institutional investors implement exclusionary screening based on direct emission intensity (the ratio of total emissions to sales) in a few salient industries. Overall, our results are consistent with an interpretation that investors are already demanding compensation for their exposure to carbon emission risk.

Using over 5,000 trades unequivocally based on nonpublic information about firm fundamentals, we find that asymmetric information proxies display abnormal values on days with informed trading. Volatility and volume are abnormally high, whereas illiquidity is low, in equity and option markets. Daily returns reflect the sign of private signals, but bid-ask spreads are lower when informed investors trade. Market makers’ learning under event uncertainty and limit orders help explain these findings. The cross-section of information duration indicates that traders select days with high uninformed volume. Evidence from the U.S. SEC Whistleblower Reward Program and the FINRA involvement addresses selection concerns. Received January 11, 2017; editorial decision December 17, 2018 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

The question of whether and how mutual fund managers provide valuable services for their clients motivates one of the largest literatures in finance. One candidate explanation is that funds process information about future asset values and use that information to invest in high-valued assets. But formal theories are scarce because information choice models with many assets are difficult to solve as well as difficult to test. This paper tackles both problems by developing a new attention allocation model that uses the state of the business cycle to predict information choices, which in turn, predict observable patterns of portfolio investments and returns. The predictions about fund portfolios' covariance with payoff shocks, cross-fund portfolio and return dispersion, and their excess returns are all supported by the data. These findings offer new evidence that some investment managers have skill and that attention is allocated rationally.

We study the impact of foreign institutional investors on global capital allocation and welfare using novel firm-level international data. Using MSCI index inclusion as an exogenous shock to foreign ownership, we show that greater foreign ownership leads to more informative stock prices and this effect arises more from increased price efficiency than from improved firm governance. We further show that the impact of capital flows on price efficiency is due to real efficiency gains, as opposed to better information disclosure. Finally, we show that foreign ownership increases market liquidity, reduces firms' cost of equity, and leads to subsequent growth in their real investments, thus improving overall welfare.

Do illegal insiders internalize legal risk? We address this question with hand-collected data from 530 SEC investigations. Using two plausibly exogenous shocks to expected penalties, we show that insiders trade less aggressively and earlier and concentrate on tips of greater value when facing higher risk. The results match the predictions of a model where an insider internalizes the impact of trades on prices and the likelihood of prosecution and anticipates penalties in proportion to trade profits. Our findings lend support to the effectiveness of U.S. regulations’ deterrence and the long-standing hypothesis that insider trading enforcement can hamper price informativeness.

We study the impact of foreign institutional investors on price efficiency with firm-level international data. Using MSCI index inclusion and the U.S. Jobs and Growth Tax Relief Reconciliation Act as exogenous shocks to foreign ownership, we show that greater foreign ownership increases stock price informativeness, especially in developed economies. This increase arises from new information that foreign investors bring in, and displacement of less informed domestic retail investors. Finally, we show that foreign ownership, particularly from active investors, increases market liquidity, reduces firms' cost of equity, and increases firms' real investment growth.

We study the distributional effects of asset ownership on price informativeness in a general equilibrium model featuring large investors (oligopolists) who have price impact and learn about individual asset payoffs, and competitive fringe that only learns from asset prices. We find that price informativeness is non-monotonic in the oligopolists’ aggregate size, decreasing in the sector’s concentration and in the size of the passive oligopolistic sector. We further decompose the size effect into a learning channel capturing investors’ quality of private signals and an informa- tion pass-through channel measuring the sensitivity of investors’ trades to private signals, and show that the pass-through channel is the primary source of variation in price informativeness relative to the size distribution.

Do claims on the private sector serve the role of safe assets? We answer this question using high-frequency panel data on prices and quantities of certificates of deposit (CD) and commercial paper (CP) issued in Europe. We show that only very short-term private securities benefit from a premium for safety. Using several identification strategies, we show that the issuance of short-term CDs, but not of CPs, strongly responds to measures of safety demand. The private production of safe assets is stronger for issuers with high credit worthiness, and breaks down during episodes of market stress. We conclude that even very short-term private assets are sensitive to changes in the information environment and should not be treated as equally safe at all times.

We examine the risk-taking behavior of money market funds during the financial crisis of 2007--2010. We find that (1) money market funds experienced an unprecedented expansion in their risk-taking opportunities; (2) funds had strong incentives to take on risk because fund inflows were highly responsive to fund yields; (3) funds sponsored by financial intermediaries with more money fund business took on more risk; and (4) funds suffered runs as a result of their risk taking. This evidence suggests that money market funds lack safety because they have strong incentives to take on risk when the opportunity arises and are vulnerable to runs. JEL Codes: G21, G23, E44. Copyright 2013, Oxford University Press.

This paper develops a new family of Bayesian semi-parametric models. A particular member of this family is used to model option prices with the aim of improving out-of-sample predictions. A detailed empirical analysis is made for European index call and put options to illustrate the ideas.

We attempt to measure the effect of competition on bias in the context of analyst earnings forecasts, which are known to be excessively optimistic because of conflicts of interest. Our natural experiment for competition is mergers of brokerage houses, which result in the firing of analysts because of redundancy (e.g., one of the two oil stock analysts is let go) and other reasons such as culture clash. We use this decrease in analyst coverage for stocks covered by both merging houses before the merger (the treatment sample) to measure the causal effect of competition on bias. We find that the treatment sample simultaneously experiences a decrease in analyst coverage and an increase in optimism bias the year after the merger relative to a control group of stocks, consistent with competition reducing bias. The implied economic effect from our natural experiment is significantly larger than estimates from OLS regressions that do not correct for the endogeneity of coverage. This effect is much more significant for stocks with little initial analyst coverage or competition.

We study whether the constraints on firms’ operations imposed by labor unions affect firms’ costs of equity. The cost of equity is significantly higher for firms in more unionized industries. This effect holds after controlling for several industry and firm characteristics, is robust to endogeneity concerns, and is not driven by omitted variables. Moreover, the unionization premium is stronger when unions face a more favorable bargaining environment and is highly countercyclical. Unionization is also positively related to various measures of operating leverage. Our findings suggest that labor unions increase firms’ costs of equity by decreasing firms’ operating flexibility.

We provide evidence for the effects of social norms on markets by studying “sin” stocks—publicly traded companies involved in producing alcohol, tobacco, and gaming. We hypothesize that there is a societal norm against funding operations that promote vice and that some investors, particularly institutions subject to norms, pay a financial cost in abstaining from these stocks. Consistent with this hypothesis, we find that sin stocks are less held by norm-constrained institutions such as pension plans as compared to mutual or hedge funds that are natural arbitrageurs, and they receive less coverage from analysts than do stocks of otherwise comparable characteristics. Sin stocks also have higher expected returns than otherwise comparable stocks, consistent with them being neglected by norm-constrained investors and facing greater litigation risk heightened by social norms. Evidence from corporate financing decisions and the performance of sin stocks outside the US also suggest that norms affect stock prices and returns.

We show theoretically that the responsiveness of a fund manager’s portfolio allocations to changes in public information decreases in the manager’s skill. We go on to estimate this sensitivity (RPI )a s theR 2 of the regression of changes in a manager’s portfolio holdings on changes in public information using a panel of U.S. equity funds. Consistent with RPI containing information related to managerial skills, we find a strong inverse relationship between RPI and various existing measures of performance, and between RPI and fund flows. We also document that both fund- and manager-specific attributes affect RPI. THE CONCEPT OF SOPHISTICATED INVESTORS permeates the economic literature in several areas, including market microstructure, tests of the efficient market hypothesis, and the performance evaluation of financial institutions. Sandroni (2000, p.1303) succinctly describes these investors as those who “are consistently better in predicting prices.” Whether such investors exist and whether they outperform others has been the subject of debate for at least a few decades, particularly in the literature on mutual funds. Specifically, while a vast number of performance measures have been proposed and extensively used to identify successful fund managers, 1 several studies question whether these measures actually capture managerial skills, given existing alternative explanations, such as luck, model misspecification, survivorship bias, or weak statistical

We study the determinants of capital income inequality in a general equilibrium portfolio choice model with endogenous information acquisition. The key elements of the model are heterogeneity in investor sophistication and in asset riskiness. The model implies capital income inequality that increases with aggregate information technology, given initial heterogeneity in sophistication. The main mechanism in the model works through endogenous investor participation in assets with different risk. Across assets, the pattern of expansion of sophisticated investors and retrenchment of unsophisticated investors, unique to our model, is consistent with asset ownership dynamics for the U.S. Quantitatively, the model generates a path for capital income inequality that matches the evolution of inequality in U.S. data.

Do public trade signals (volume and asset prices) reveal the presence of privately informed investors? What signals are most reliable in this regard? We examine these issues using a novel sample of over 5,000 equity and option trades based on material and nonpublic information documented in the Securities and Exchange Commission's (SEC) insider trading litigation files. We find that information embedded in equity (option) markets offers a generally weaker (stronger) signal of private information. Days when informed investors trade display, both in stock and option markets, abnormally high volatility and volume and low illiquidity. The most consistent signals combine both option and stock volume, especially the volume of leveraged and short-term options. We exploit the implementation of the SEC's Whistleblower Program to assess the validity of our approach against selection bias. Overall, our results provide new guidance in the search for private information.

Despite extensive disclosure requirements, mutual fund investors do not observe all actions of fund managers. We estimate the impact of unobserved actions on fund returns using the return gap, which is defined as the difference between the reported fund return and the return of a portfolio that invests in the previously disclosed holdings after adjusting for expenses. Analyzing monthly return data on more than 2,500 unique U.S. equity funds over the period 1984-2003, we document a substantial cross-sectional heterogeneity and time-series persistence in the return gap, thus demonstrating that unobserved actions of some funds persistently create value, while such actions of others destroy value. Most important, we show that the return gap helps to predict future fund performance and conclude that fund investors should use the return gap as an additional measure to evaluate the performance of mutual funds.

Mutual fund managers may decide to deviate from a well-diversified portfolio and concentrate their holdings in industries where they have informational advantages. In this paper, we study the relation between the industry concentration and the performance of actively managed U.S. mutual funds from 1984 to 1999. Our results indicate that, on average, more concentrated funds perform better after controlling for risk and style differences using various performance measures. This finding suggests that investment ability is more evident among managers who hold portfolios concentrated in a few industries. ACTIVELY MANAGED MUTUAL FUNDS are an important constituent of the financial sector. Despite the well-documented evidence that, on average, actively managed funds underperform passive benchmarks, mutual fund managers might still differ substantially in their investment abilities.1 In this paper, we examine whether some fund managers create value by concentrating their portfolios in industries where they have informational advantages. Conventional wisdom suggests that investors should widely diversify their holdings across industries to reduce their portfolios' idiosyncratic risk. Fund

We show that capital income inequality is large and growing fast, accounting for a significant portion of total income inequality. We study its determinants in a general equilibrium portfolio choice model with endogenous information acquisition and heterogeneity across household sophistication and asset riskiness. The main mechanism works through endogenous household participation in assets with different risk. The model implies capital income inequality that increases with aggregate information technology. Quantitatively, it generates a path of capital income inequality that matches the evolution of inequality in the U.S.

We document a growing polarization of investment strategies of institutional and individual investors in the US equity market since the 1990s. Institutional investors have been focusing more and more on active trading of individual securities, while individual investors have increasingly shifted towards investing in mutual funds and exchange traded funds. Specifically, institutional investor ownership of individual equities has doubled since the late 1990s, and it currently exceeds 70% of the total equity ownership. Meanwhile, institutional ownership of exchange traded funds has remained constant at approximately 40%. This trend has been accompanied by a significant increase in the volatility of trading volumes. Exchange traded funds outraced the trading in individual equities by a factor of ten in the early part of the sample, but volumes collapsed in the aftermath of the financial crisis of 2007-2008. Low trading volumes have been puzzlingly persistent, despite the large recovery in equity market returns following the crisis. To shed light on these developments, we build a model of heterogeneous portfolio choice. We model the choice of investment strategies by households and sophisticated investors in an environment in which information acquisition and processing are costly (in the sense of Sims (2003), and Kacperczyk, van Nieuwerburgh, and Veldkamp (2012)). The key choice in the model is participation in active (informed) trading versus passive trading. This gives rise to endogenous market segmentation into sophisticated and unsophisticated investors. We explore the implications of the model for the behavior of equity returns and their volatility, as well as the endogenous market structure of the institutional asset management industry.

We study the impact of the zero lower bound interest rate policy on the industrial organization of the U.S. money fund industry. We find that in response to policies that maintain low interest rates, money funds: change their product offerings by investing in riskier asset classes; are more likely to exit the market; and reduce the fees they charge their investors. The consequence of fund closures resulting from interest rate policy is the relocation of resources in affected fund families and in the asset management industry in general, as well as decline in capital of issuers borrowing from money funds.

We provide novel evidence that mutual fund returns are predictable after periods of high market returns but not after periods of low market returns. The asymmetric conditional predictability in relative performance cannot be fully explained by time-varying differences in transaction costs, in style exposures, or in survival probabilities of funds. Performance predictability is more pronounced for funds catering to retail investors than for funds catering to institutional investors, suggesting that unsophisticated investors make systematic mistakes in their capital allocation decisions.

We propose a new definition of skill as a general cognitive ability to either pick stocks or time the market at different times. We find evidence for stock picking in booms and for market timing in recessions. Moreover, the same fund managers that pick stocks well in expansions also time the market well in recessions. These fund managers significantly outperform other funds and passive benchmarks. Our results suggest a new measure of managerial ability that gives more weight to a fund’s market timing in recessions and to a fund’s stock picking in booms. The measure displays far more persistence than either market timing or stock picking alone and can predict fund performance.

We propose a new definition of skill as general cognitive ability to pick stocks or time the market. We find evidence for stock picking in booms and market timing in recessions. Moreover, the same fund managers that pick stocks well in expansions also time the market well in recessions. These fund managers significantly outperform other funds and passive benchmarks. Our results suggest a new measure of managerial ability that weighs a fund's market timing more in recessions and stock picking more in booms. The measure displays more persistence than either market timing or stock picking alone and predicts fund performance.

A firm's termination generates bankruptcy costs. This may create incentives for a firm's owner to bail out a firm in bankruptcy and to curb the firm's risk taking outside bankruptcy. We analyze the role of such implicit guarantees in the context of financial institutions that sponsor money market mutual funds. Our identification strategy exploits a large, exogenous expansion in risk-taking opportunities of money market funds during the period of August 2007 to August 2008. We find that a fund's response to the expansion depends on its sponsor's ability to provide implicit guarantees: Funds sponsored by financial institutions with higher equity take on less risk than those sponsored by financial institutions with lower equity. Moreover, fund sponsors with higher equity are more likely to provide financial support to their funds during a market-wide run in September 2008. The difference in risk taking disappears once implicit guarantees by fund sponsors are replaced with an explicit government guarantee. Overall, our findings suggest that implicit guarantees may reduce, rather than increase, risk taking.

A firm's termination generates bankruptcy costs. This may create incentives for a firm's owner to bail out a firm in bankruptcy and to curb the firm's risk taking outside bankruptcy. We analyze the role of such implicit guarantees in the context of financial institutions that sponsor money market mutual funds. Our identification strategy exploits a large, exogenous expansion in risk-taking opportunities of money market funds during the period of August 2007 to August 2008. We find that a fund's response to the expansion depends on its sponsor's ability to provide implicit guarantees: Funds sponsored by financial institutions with higher equity take on less risk than those sponsored by financial institutions with lower equity. Moreover, fund sponsors with higher equity are more likely to provide financial support to their funds during a market-wide run in September 2008. The difference in risk taking disappears once implicit guarantees by fund sponsors are replaced with an explicit government guarantee. Overall, our findings suggest that implicit guarantees may reduce, rather than increase, risk taking.

The question of whether and how mutual fund managers provide valuable services for their clients motivates one of the largest literatures in finance. One candidate explanation is that funds process information about future asset values and use that information to invest in high-valued assets. But formal theories are scarce because information choice models with many assets are difficult to solve as well as difficult to test. This paper tackles both problems by developing a new attention allocation model that uses the state of the business cycle to predict information choices, which in turn, predict observable patterns of portfolio investments and returns. The predictions about fund portfolios’ covariance with payoff shocks, cross-fund portfolio and return dispersion, and their excess returns are all supported by the data. These findings offer new evidence that some investment managers have skill and that attention is allocated rationally.

This paper shows how uncertainty about the type of return distribution (distribution uncertainty) can be incorporated in asset allocation decisions by using a novel, Bayesian semiparametric approach. To evaluate the economic importance of distribution uncertainty, the extent of changes in ex-ante optimal asset allocations of investors who factor in distribution uncertainty into their portfolio model is examined. The key findings are: (a) distribution uncertainty is highly time varying; (b) compared to investors facing parameter uncertainty, investors under distribution uncertainty, on average, allocate less money to risky assets; their allocations are less variable; and their certainty-equivalent losses from ignoring distribution uncertainty can be economically significant; (c) portfolio strategies of such investors generate statistically higher returns, even after controlling for common factors.

In the world of money management, professional intermediaries constitute a large and important group. How much does internal firm organization affect the performance and allocation of resources in these intermediaries? This question has received relatively little attention in academic literature. We examine this question in the context of mutual funds and provide direct evidence that internal organization structure -- in particular the decision making process about investments -- impacts their investment behavior and performance. Our empirical evidence is consistent with tradeoffs generated by theories of organizational economics. Decentralized mutual funds provide more discretion in investment decisions to their managers and as a result have higher performance than their centralized counterparts. However, since decision making is done individually by managers in decentralized structure, there is a diversification loss due to individual funds not accounting for the correlation of their own portfolio returns with the returns of other managers in the fund. These results obtain both in the panel setting and in a quasi-experiment that involves an exogenous shift in the precision of publicly available information on some stocks. The results of the paper offer several broad implications for issues related to delegated portfolio management. First, the results help understand what drives some funds to deliver better performance than others. This has potential to shed light on the long standing academic debate on whether or not mutual fund managers have skills. If a large population of funds have centralized investment decision making, it may explain why many studies find that managers in the population do not have superior skills. Second, by showing that organizational structure is an important determinant of fund strategies and performance, it connects the literature on firm boundaries with financial intermediation. Besides shedding light on the "black box" of mutual fund management, this insight has the potential to inform us on the shifts in the mutual fund industry over time. For instance, our research could inform us on how competition for talent from hedge fund industry (with more decentralized decision making) may have influenced mutual fund families to changing their decision making process to a decentralized one as well. Alternatively, our research can inform better on how the difference in investment and performance across different organizational forms may be expected to evolve depending on the labor market conditions.

We examine the risk-taking behavior of money market funds during the fi nancial crisis of 2007-2010. We find that: (1) money market funds experienced an unprecedented expansion in their risk-taking opportunities; (2) funds had strong incentives to take on risk because fund inflows were highly responsive to fund yields; (3) funds sponsored by financial intermediaries with more money fund business took on more risk; (4) funds suff ered runs as a result of their risk taking. This evidence suggests that money market funds lack safety because they have strong incentives to take on risk when the opportunity arises and are vulnerable to runs.

We study the impact of a powerful non-financial stakeholder – unionized workers – on the pricing of corporate debt. Firms in more unionized industries have lower bond yields. This relation is stronger in firms with weaker financial conditions and cannot be explained by the correlation of unionization with industry characteristics, governance mechanisms, or financial leverage. Firms in unionized industries implement less risky investment policies, and are less likely targets of acquisitions. Unionization reduces yields by more when firms’ takeover barriers are lower. Hence, unions are viewed favorably in the bond market because, through their influence on corporate affairs, they protect bondholders’ wealth.