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Working Paper
Innovation, investor sentiment, and firm-level experimentation
Aramonte, Sirio (2015-08-12)
Due to frictions like informational externalities, firms invest too little in learning the productivity of newly available technologies through small-scale experimentation. I study the effect of investor sentiment on the relation between technological innovation and future firm-level R&D expenses, which include the resources used for small-scale experimentation. I find that rapidly improving investor sentiment strengthens the effect of technological innovation on one-year-ahead R&D expenses, and that the effect is more pronounced for high-tech firms with tighter financing constraints. The ...
Finance and Economics Discussion Series , Paper 2015-67

Working Paper
The Monetization of Innovation
Warusawitharana, Missaka; Zucchi, Francesca (2022-12)
We develop a dynamic model for digital service firms, which invest in monetization to generate revenues from services provided to customers for free. Our model captures and explains why such firms often build a large customer base and become highly valued while continuing to suffer losses—traditional models would struggle to explain this pattern. Counterfactual analysis reveals that monetization uncertainty slows technological advancement by diverting resources away from innovation. We also show that regulation aimed at protecting user privacy has sizable adverse effect on firm size and the ...
Finance and Economics Discussion Series , Paper 2022-084

Working Paper
An Estimated Structural Model of Entrepreneurial Behavior
Pratap, Sangeeta; Jones, John Bailey (2017-05-08)
Using a rich panel of owner-operated New York dairy farms, we provide new evidence on entrepreneurial behavior. We formulate a dynamic model of farms facing uninsured risks and financial constraints. Farmers derive nonpecuniary benefits from operating their businesses. We estimate the model via simulated minimum distance, matching both production and financial data. We find that financial factors and nonpecuniary benefits are of first-order importance. Collateral constraints and liquidity restrictions inhibit borrowing and the accumulation of capital. The nonpecuniary benefits to farming are ...
Working Paper , Paper 17-7

Working Paper
High-Yield Debt Covenants and Their Real Effects
Bräuning, Falk; Ivashina, Victoria; Ozdagli, Ali (2023-08-22)
High-yield debt, including leveraged loans, features incurrence financial covenants or "cov-lite" provisions. These covenants differ from traditional loans' maintenance covenants, as they preserve equity control rights but impose specific restrictions on the borrower after crossing the covenant threshold. Contrary to the prevailing belief that incurrence covenants offer limited protection for creditors, our research reveals a significant and sudden decline in investment upon triggering these covenants. This evidence highlights a novel propagation mechanism for economic shocks, wherein ...
Working Papers , Paper 2311

Working Paper
Uncertainty, Financial Frictions, and Investment Dynamics
Gilchrist, Simon; Zakrajšek, Egon; Sim, Jae W. (2014-04-01)
Micro- and macro-level evidence indicates that fluctuations in idiosyncratic uncertainty have a large effect on investment; the impact of uncertainty on investment occurs primarily through changes in credit spreads; and innovations in credit spreads have a strong effect on investment, irrespective of the level of uncertainty. These findings raise a question regarding the economic significance of the traditional "wait-and-see" effect of uncertainty shocks and point to financial distortions as the main mechanism through which fluctuations in uncertainty affect macroeconomic outcomes. The ...
Finance and Economics Discussion Series , Paper 2014-69

Working Paper
Legal Institutions, Credit Markets, and Economic Activity
Heimer, Rawley; Cookson, J Anthony; Brown, James R. (2014-12-08)
This paper provides novel evidence on the causal connections between legal institutions, credit markets, and real economic activity. Our analysis exploits an unexplored within-country setting?Native American reservations?together with quasi-experimental variation in legal contract enforcement wherein the US Congress externally assigned state courts to adjudicate contracts on a subset of reservations. According to area-specific data on small business credit, reservations assigned to state courts, which enforce contracts more predictably than tribal courts, have stronger credit markets. ...
Working Papers (Old Series) , Paper 1434

Journal Article
Assisting Firms during a Crisis: Benefits and Costs
Wall, Larry D. (2020-08-10)
Public and private efforts to reduce COVID-19 infection levels have led to a sharp drop in economic activity around the world. In an attempt to mitigate the damage to businesses, governments around the world have implemented a variety of financial programs to help firms. These programs have been criticized as interfering with markets, providing bailouts, and creating adverse incentives. In this article, I review both the rationale for government-provided assistance and the costs of providing that assistance from the perspective of how that aid effects the likely level and volatility of ...
Policy Hub , Volume 2020 , Issue 10 , Pages 18

Working Paper
Debt Maturity and Commitment on Firm Policies
Gamba, Andrea; Saretto, Alessio (2026-03-04)
When firms can trade debt only at discrete dates, debt maturity becomes an effective tool to discipline investment and debt policies. In the absence of other frictions, single-period debt restores first-best investment. With market freezes, long-maturity debt amplifies underinvestment and the leverage ratchet effect, while short maturity mitigates these distortions. Calibrating the model to U.S. non-financial firms shows that choosing the optimal debt maturity can reduce the cost of commitment problems and market frictions by up to 4% of firm value. A decomposition of the equilibrium credit ...
Working Papers , Paper 2303

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