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- Volume 14, 2022
Annual Review of Financial Economics - Volume 14, 2022
Volume 14, 2022
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A Survey of Alternative Measures of Macroeconomic Uncertainty: Which Measures Forecast Real Variables and Explain Fluctuations in Asset Volatilities Better?
Vol. 14 (2022), pp. 439–463More LessIn the past 20 years, measures of economic uncertainty have been developed that are purely market price based; structural model based, using data on real fundamentals and asset prices; text based; or survey based. We compare the performance of these uncertainty measures in forecasting three real variables with irreversibilities—investment, hiring, and credit creation—as well as in explaining fluctuations in stock market and Treasury bond market volatility. In general, we find that structural model–based measures do better than measures constructed using other approaches, with a model of stock market volatility by David and Veronesi performing the best on several (but not all) dimensions. Their learning-based model's volatility places time-varying weights on inflation, earnings, and consumption news, as agents in the economy assess the impact that inflation has on the stability of real economic growth.
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A Review of China's Financial Markets
Grace Xing Hu, and Jiang WangVol. 14 (2022), pp. 465–507More LessThe fast growth of China's economy has brought it not only to the center of the global economy but also to a transition point in its growth model, a transition from scale to efficiency, speed to sustainability, input driven to innovation led. How its financial markets can drive this new growth model and facilitate the transition are pressing challenges, for China and for the world. We provide a comprehensive review of China's financial markets, including government bonds, corporate/credit bonds, stocks, asset-backed securities, financial derivatives, investment management, and currency, focusing on their growth paths, distinct characteristics, and unique opportunities. Despite fast expansion at times, their development is often lagging behind market needs, uneven over time, and unbalanced across markets. This developmental pattern is driven mostly by the government's immediate policy objectives rather than by the markets' ultimate efficiency in serving their key functions, including liquidity provision, price discovery, and risk allocation.
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Corporate Debt and Taxes
Vol. 14 (2022), pp. 509–534More LessWe provide updates to and perspectives on the enduring topic of debt and taxes. The recent decade brought us new empirical strategies, accounting rules, and tax laws. We discuss how these and other developments change our understanding of leverage and taxes. Overall, tax incentives still do not seem to have a consistent, first-order effect on corporate capital structure. This presents a puzzle as governments increasingly limit interest deductibility, citing its contribution to overleverage and distress. We discuss critical empirical challenges such as measurement, highlight issues surrounding assumptions about tax rates and real-world financing decisions, and offer insights and direction for future research. We conclude that rather than asking if taxes are a first-order driver of corporate capital structure, a more productive goal is a greater understanding of when tax incentives yield material effects on corporate capital structure.
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Corporate Culture
Vol. 14 (2022), pp. 535–561More LessCorporate culture is an omnibus term that includes many elements that are relevant to a firm, like norms, values, knowledge, and customs. Economists have made great progress recently in devising methods of measuring different aspects of corporate culture. These empirical measures of culture have explained mergers and acquisitions, corporate risk-taking, and unethical behaviors observed in corporations, among other topics. We argue that unpacking corporate culture into its components is the right way to research it empirically. Theories of corporate culture are still in development, and we discuss the major contributions thus far. We argue that a theory of the firm and of corporate decision-making that is based on corporate culture is more germane to the practical realities of firms’ inner workings than prevailing theories based on property rights and agency costs. Corporate culture has the potential to set the theoretical paradigm for all corporate finance research.
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Kindleberger Cycles: Method in the Madness of Crowds?
Vol. 14 (2022), pp. 563–585More LessCorporate R&D has a social return far above its internal rate of return to the innovating corporation, and so it is chronically underfunded from a social perspective. Kindleberger cycles, irregularly recurring stock market manias, panics, and crashes that are prominent in financial history, are also a major problem for mainstream economics. If manias inundating hot new technologies with capital sufficiently counter chronic underinvestment in innovation, economy-level selection may favor institutions and behavioral norms conducive to Kindleberger cycles despite individual agents’ losses in panics and crashes.
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