Venture Capital Booms and Start-Up Financing

We review the growing literature on the relationship between venture capital (VC) booms and start-up financing, focusing on three broad areas. First, we discuss the drivers of large inflows into the VC asset class, particularly in recent years, which are related to but also distinct from macroeconomic business cycles and stock market fluctuations. Second, we review the emerging literature on the real effects of VC financing booms. A particular focus of this work is to highlight the potential impact that booms (and busts) can have on the types of firms that VC investors choose to fund and the terms at which they are funded, independent of investment opportunities—thereby shaping the trajectory of innovation being conducted by start-ups. Third, an important insight from recent research is that booms in VC financing are not just a temporal phenomenon but can also be seen in terms of the concentration of VC investment in certain industries and geographies. We also review the role of government policy, exploring the degree to which it can explain the concentration of VC funding in the United States over the past 40 years in just two broad areas—information and communication technologies and biotechnology. We conclude by highlighting promising areas of further research.

Recent Developments in Factor Models and Applications in Econometric Learning

This article provides a selective overview of the recent developments in factor models and their applications in econometric learning. We focus on the perspective of the low-rank structure of factor models and particularly draw attention to estimating the model from the low-rank recovery point of view. Our survey mainly consists of three parts. The first part is a review of new factor estimations based on modern techniques for recovering low-rank structures of high-dimensional models. The second part discusses statistical inferences of several factor-augmented models and their applications in statistical learning models. The final part summarizes new developments dealing with unbalanced panels from the matrix completion perspective.

Consumer Protection for Financial Inclusion in Low- and Middle-Income Countries: Bridging Regulator and Academic Perspectives

Markets for consumer financial services are growing rapidly in low- and middle-income countries and are being transformed by digital technologies and platforms. With growth and change come concerns about protecting consumers from firm exploitation due to imperfect information and contracting as well as from their own decision-making limitations. We seek to bridge regulator and academic perspectives on these underlying sources of harm and five potential problems that can result: high and hidden prices, overindebtedness, postcontract exploitation, fraud, and discrimination. These potential problems span product markets old and new and could impact micro- and macroeconomies alike. Yet there is little consensus on how to define, diagnose, or treat such problems. Evidence-based consumer financial protection will require substantial advances in theory and especially empirics, and we outline key areas for future research. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

The Rise of State-Owned Investors: Sovereign Wealth Funds and Public Pension Funds

State-owned investors (SOIs), including sovereign wealth funds and public pension funds, have $27 trillion in assets under management in 2020, making these funds the third largest group of asset owners globally. SOIs have become the largest and are among the most important private equity investors, and they are key investors in other alternative asset investments such as real estate, infrastructure, and hedge funds. SOIs are also leaders in promoting environmental, social, and governance policies and corporate social responsibility policies in investee companies. We document the rise of SOIs, assess their current investment policies, and describe how their state ownership both constrains and enhances their investment opportunity sets. We survey the most impactful recent academic research on sovereign wealth funds, public pension funds, and their closest financial analogs, private pension funds. We also introduce a new Governance-Sustainability-Resilience Scoreboard for SOIs and survey research examining their role in promoting good corporate governance. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Banks and Negative Interest Rates

In this article, we review the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks’ retail deposit rates is hindered by a zero lower bound. We summarize existing research on the impact of negative rates on banks’ lending and securities portfolios as well as their consequences for the real economy. Finally, we discuss the role of different initial conditions when the policy rate becomes negative, and potential interactions between negative policy rates and other unconventional monetary policies. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Do Capital Structure Models Square with the Dynamics of Payout?

We explore whether theoretically the target leverage and pecking-order models can be reconciled with payout smoothing. Investment absorbs a significant part of income and asset volatility if the firm follows both a payout target and a net debt ratio (NDR) target. A positive (negative) NDR amplifies (dampens) shocks in assets. Slow adjustment toward the NDR target facilitates payout smoothing. Under strict pecking-order financing, income shocks are absorbed primarily by changes in net debt. More payout smoothing implies a stronger negative relation between debt and net income. Shocks to assets in place need not affect current payout. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

The Economics of Insurance: A Derivatives-Based Approach

This article revisits the economics of insurance using insights from derivatives pricing and hedging. Applying this perspective, I emphasize the following insights applicable to insurance. First, I provide a valid justification for the use of arbitrage-free insurance premiums. This justification applies in both complete and incomplete markets. Second, I demonstrate the importance of diversifiable idiosyncratic risk for the determination of insurance premiums. And third, analyzing the insurance industry using the functional approach, I show the importance of derivatives and the synthetic construction of derivatives for reducing an insurance company's insolvency risk. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Financial Architecture and Financial Stability

This article studies the links between financial stability and the architecture of financial systems. We review the existing literature and provide organizing frameworks for analyzing three empirically important aspects of financial architecture: the rise of nonbank financial intermediaries, the regulatory response to these structural changes, and the emergence of complex interbank networks. One of our main new results is a necessary and sufficient condition for whether nonbank intermediaries are immune to runs in an extended version of the Diamond–Dybvig model. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

What Do We Know About Corporate Bond Returns?

Recently, there has been a fast-growing literature on the determinants of corporate bond returns, in particular, the driving force of cross-sectional return variation. In this review, we first survey recent empirical studies on this important topic. We discuss cross-sectional evidence as well as time-series evidence. We then present a model-based analysis of individual corporate bond returns using the structural approach for credit risk modeling. We show, among other things, that the expected corporate bond return implied by the Merton model predicts 1-month-ahead corporate bond returns in the cross section. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.