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Retail investors pay over twice as much attention to local companies than non-local ones, based on Google searches. News volume and volatility amplify this attention gap. Attention appears causally related to perceived proximity: first, acquisition by a nonlocal company is associated with less attention by locals, and more by nonlocals close to the acquirer; second, COVID-19 travel restrictions correlate with a drop in relative attention to nonlocal companies, especially in locations with fewer fights after the outbreak. Finally, local attention predicts volatility, bid-ask spreads and nonlocal attention, not viceversa. These findings are consistent with local investors having an information-processing advantage.
Using the pandemic as a laboratory, we show that asset markets assign a time- varying price to firms' disaster risk exposure. In 2020 the cross-section of realized and expected stock returns reflected firms' different exposure to the pandemic, as measured by their vulnerability to social distancing. Realized and expected return differentials initially widened and then narrowed, but disaster exposure still commanded a risk premium in December 2020. When inferred from market outcomes, resilience correlates not only with social distancing, but also with cash and environmental ratings. However, vulnerability to social distancing is the only characteristic that identifies persistently scarred firms.
Climate risk has become a major concern for financial institutions and financial markets. Yet, climate policy is still in its infancy and contributes to increased uncertainty. For example, the lack of a sufficiently high carbon price and the variety of definitions for green activities lower the value of existing and new capital, and complicate risk management. This column argues that it would be welfare-enhancing if policy changes were to follow a predictable longer-term path. Accordingly, the authors suggest a role for financial regulation in the transition.
Using novel monthly data for 226 euro-area banks from 2007 to 2015, we investigate the determinants of changes in banks’ sovereign exposures and their effects during and after the crisis. First, public, bailed out and poorly capitalized banks responded to sovereign stress by purchasing domestic public debt more than other banks, with public banks’ purchases growing especially in coincidence with the largest ECB liquidity injections. Second, bank exposures significantly amplified the transmission of risk from the sovereign and its impact on lending. This amplification of the impact on lending does not appear to arise from spurious correlation or reverse causality.
Has economic research been helpful in dealing with the financial crises of the early 2000s? On the whole, the answer is negative, although there are bright spots. Economists have largely failed to predict both crises, largely because most of them were not analytically equipped to understand them, in spite of their recurrence in the last 25 years. In the pre-crisis period, however, there have been important exceptions – theoretical and empirical strands of research that largely laid out the basis for our current thinking about financial crises. Since 2008, a flurry of new studies offered several different interpretations of the US crisis: to some extent, they point to potentially complementary factors, but disagree on their relative importance, and therefore on policy recommendations. Research on the euro debt crisis has so far been much more limited: even Europe-based researchers – including CEPR ones – have often directed their attention more to the US crisis than to that occurring on their doorstep. In terms of impact on policy and regulatory reform, the record is uneven. On the one hand, the swift and massive liquidity provision by central banks in the wake of both crises is, at least partly, to be credited to previous research on the role of central banks as lenders of last resort in crises and on the real effects of bank lending and monetary policy. On the other hand, economists have had limited impact on the reform of prudential and security market regulation. In part, this is due to their neglect of important regulatory choices, which policy-makers are therefore left to take without the guidance of academic research-based analysis.
The euro crisis was fueled by the diabolic loop between sovereign risk and bank risk, coupled with cross-border flight-to-safety capital flows. European Safe Bonds (ESBies), a union-wide safe asset without joint liability, would help to resolve these problems. We make three contributions. First, numerical simulations show that ESBies would be at least as safe as German bunds and approximately double the supply of euro safe assets when protected by a 30%-thick junior tranche. Second, a model shows how, when and why the two features of ESBies — diversification and seniority — can weaken the diabolic loop and its diffusion across countries. Third, we propose a step-by-step guide on how to create ESBies, starting with limited issuance by public or private-sector entities.
We employ a representative sample of 80,972 Italian firms to forecast the drop in profits and the equity shortfall triggered by the COVID-19 lockdown. A 3-month lockdown generates an aggregate yearly drop in profits of about 10% of GDP, and 17% of sample firms, which employ 8.8% of the sample’s employees, become financially distressed. Distress is more frequent for small and medium-sized enterprises, for firms with high pre-COVID-19 leverage, and for firms belonging to the Manufacturing and Wholesale Trading sectors. Listed companies are less likely to enter distress, whereas the correlation between distress rates and family firm ownership is unclear.
(JEL G01, G32, G33)