Research

Do stock price run-ups predictably revert? We develop a model of financial markets with two types of investors: rational investors and “oversensitive” investors who react excessively to salient public news. The model yields a summary statistic for the degree to which a stock price has overreacted to news: the gap in holdings between oversensitive and rational investors. We compute this measure empirically using quarterly institutional holdings data. We first measure each investor’s news sensitivity using their tendency to purchase stocks that have experienced positive earnings announcements. Consistent with our model’s premise, we find that news sensitivity is a persistent investor characteristic. We next aggregate our investor-level measure to the stock level to compute the asset-level holdings gap between oversensitive and rational investors. A larger holdings gap forecasts less continuation in stock prices and greater reversals in the long run, especially for extreme price run-ups. Furthermore, our holdings gap aggregates several distinct channels of overreaction, including both price extrapolation and overreaction to non-price information. 

I analyze the extent to which transitory credit disruptions can induce long-lasting structural changes on firms and industries by allowing financially healthy firms to persistently gain market share from distressed ones. I examine the 2008-09 Global Financial Crisis using the bank shift-share instrument of Chodorow-Reich (2014) as a measure of firm-level exposure to the crisis. I first show that relatively exposed firms experience persistent post-crisis employment losses, and that this persistence is largely explained by the exit of these firms from certain geographic product markets. Turning to a firm-by-market level analysis, I find that exposed firms disproportionately exit markets in which competitor firms are relatively unaffected by the crisis. This interactive competitor effect can explain 20-50% of the long-term firm-level effect of the shock. Several pieces of evidence suggest a key role for product market displacement forces: competitor crisis exposure only matters when defined within the firm’s narrow industry; the estimated effect is stronger in industries with higher proxied advertising expenditures; and the financial health of small businesses matters for exposed firms’ exit decisions. Markets with higher dispersion in firm exposure to the Global Financial Crisis experienced significantly more labor reallocation and increases in concentration post-crisis.

Should policymakers aim to directly prevent job destruction in recessions? The answer depends on the extent to which worker job losses change equilibrium outcomes by congesting the labor market. In a model with search frictions and heterogenous jobs, we show that the externality of a lost job is negative for workers and positive for firms, with the overall magnitude dependent on the speed with which firms replenish lost jobs. We then use administrative microdata to quantify the equilibrium spillover effects of job destruction in the cross-section of U.S. labor markets for 1997-2015. We provide conditions under which we can use the employment decisions of large, national firms to identify labor market spillovers. Workers who lose jobs in labor markets with a one percentage point increase in local job destruction experience a 1.2% reduction of earnings over six years, half of which is a result of lower employment. Our estimates imply that job destruction accounts for about one-fourth of the cyclicality of worker job loss in our sample. We calibrate a job ladder model to our spillover estimates on workers. Our quantitative model implies that using employment subsidies to smooth job destruction following aggregate shocks is welfare-improving.

How do firms shape the transmission of macroeconomic shocks and policy? Financial accelerator theories emphasize the role of firm-level financing frictions in amplifying the macroeconomic impact of aggregate shocks. While this literature generally focuses on capital investment, we consider how the effects of monetary shocks are amplified through links between financing frictions and labor demand. Under financial acceleration, firms reduce labor demand as financing constraints become more severe in response to adverse shocks, lowering labor income and thereby aggregate demand. We empirically test this channel with a “micro-to-macro” approach based off the universe of US public firms. We first show that firms that ex ante appear to be relatively financially constrained contract employment more after a monetary tightening. We then assess the aggregate implications of this employment channel through a regional design. We construct measures of a given county’s exposure to public firms with differential financial constraints, and document that more exposed counties exhibit stronger employment declines following contractionary monetary shocks. Preliminary evidence suggests that within-county spillovers of constrained firms to the regional labor market are concentrated in non-tradable establishments, suggesting that interactions between aggregate demand and financial amplification through employment may be operative.