Earticle

In this paper, we examine the impact of legal uncertainty on economic activity. We develop a simple model that distinguishes between two types of legal uncertainty: idiosyncratic (diversifiable) and systematic (nondiversifiable), both of which can reduce economic activity. We test the model’s predictions using micro-level data on bankruptcy judges and corporate loans in Korea. Exploiting random assignment of cases to judges and exogenous judge rotations in the judicial system, we compute time-varying court-level measures of debtor-friendliness and legal uncertainty as perceived by debtors and creditors. Our results show that firms tend to file for restructuring in courts with high levels of debtor-friendliness and low levels of legal uncertainty. We also find that higher legal uncertainty decreases the size of credit markets, predominantly for high-risk firms. Our analysis further indicates that credit supply is less sensitive to idiosyncratic sources of legal uncertainty than credit demand, as banks can diversify idiosyncratic legal uncertainty, whereas firms cannot.

We show that illiquid bonds can become more expensive than liquid bonds with almost identical cash flows during market distress times. The economic mechanism behind the results is search frictions. When the search friction is high, marginal traders prefer to sell liquid bonds at lower prices than illiquid bonds because failure to find buyers can be costly. We empirically identify the reversed liquidity premium through within-issuer-date matching of bonds and the regression discontinuity design based on newly issued corporate bonds. In both the identification settings, we find that the yield differentials between illiquid and liquid bonds become negative during the market distress times. Using insurance company trades, we document transactionlevel evidence for the reversed liquidity premium for same-issuer bonds on the same day that are traded by the same insurer.

Similarity between two stocks is measured by the distance between their characteristics such as price, size, book-to-market, return on assets, and investment- to-assets. We find that after a stocks most similar stocks have experienced high (low) returns in the past month, this focal stock tends to earn an abnormally high (low) return in the current month. The long-short portfolio strategy sorted on similar-stocks past average return earns a monthly CAPM alpha of 1:25% and a Fama-French six- factor alpha of 0:85%. This similarity effect is robust after controlling for style investing and a wide range of well-known rm-level characteristics that can predict returns in the cross section. Our result is consistent with the increased propensity for investors to buy other stocks with similar characteristics after experiencing positive returns for a currently held stock. We also explore other potential explanations for our findings.

Stock and bond prices move together with greater country-specific risk. Bonds hedge global growth expectation risk with low country-specific risk, resulting in a negative stockbond correlation. However, as country-specific risk increases, bonds do not effectively hedge stocks because higher local growth expectation tends to lower inflation, leading to higher stock and bond prices. Consequently, countries with greater country-specific risk exhibit a higher stock-bond correlation. Investments in countries with a positive stockbond relationship outperform those with a negative relationship by 7–11%. The superior performance is not driven by investments in a fixed set of countries.

Longer life expectancy and insufficient savings expose individuals to financial vulnerability in older ages and prompt government support measures. We study a government subsidy program for the low-income elderly population in Singapore. Using comprehensive, high-frequency transaction data, we estimate a marginal propensity to consume (MPC) out of the permanent income increases of 0.7, driven by precautionary savings and bequest motives. More liquidity-constrained recipients exhibit an MPC of 1. We find no evidence of labor supply reduction or other strategic behaviors. We discuss implications for eligibility criteria, payment frequency, and distribution form in policy design.

Using novel indirect employment data and a Supreme Court ruling against subcontracted employment, I show that the contingent employment of skilled labor reduces innovation. Following the ruling, establishments with a higher reliance on subcontracted workers innovate more compared to those with a lesser reliance. This nding is conditional on compensation schemes rewarding employees for their investment in rm-specic skills and long-term performance, stems from collaborations with existing inventor employees, and does not coincide with increases in operating leverage, R&D, or capital intensity.

I examine whether suppliers modify trading strategies upon their customers’ unionization. I demonstrate that when customers unionize, suppliers experience negative stock returns and rely less on the unionized customers for sales. Results are robust to alternatively using a regression discontinuity design. Suppliers reduce their exposure to unionized customers due to the demand uncertainty arising from potential labor disruptions, the customers’ reduced competitiveness in the product market, and customers’ potential shifting of unionization costs to suppliers. However, in certain cases, customer unionization mitigates the negative effect of customers’ default risk on their relationship with suppliers.