Asset Pricing with Endogenously Uninsurable Tail Risk

Abstract

helpful comments. The authors would also like to thank Jincheng Tong, Yuki Yao, and Chao Ying for their assistance and comments on the paper. We thank Joan Gieseke and James Holt for excellent editorial assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Customer Capital, Financial Constraints, and Stock Returns

“…According to equation (2.13), holding B t constant, Γ t increases with τ t , implying that the firm with higher ICC has higher operating leverage. 14 Similar optimal contracting problems with limited commitment have been studied in the literature (see, e.g., Jermann, 2000, 2001;Albuquerque and Hopenhayn, 2004;Rampini and Viswanathan, 2013;Ai and Bhandari, 2018;Ai and Li, 2015;Bolton, Wang and Yang, 2018). In particular, Ai and Bhandari (2018) develop a general equilibrium model with two-sided limited commitment and moral hazard to provide a unified view of labor market risk and asset prices.…”

“…14 Similar optimal contracting problems with limited commitment have been studied in the literature (see, e.g., Jermann, 2000, 2001;Albuquerque and Hopenhayn, 2004;Rampini and Viswanathan, 2013;Ai and Bhandari, 2018;Ai and Li, 2015;Bolton, Wang and Yang, 2018). In particular, Ai and Bhandari (2018) develop a general equilibrium model with two-sided limited commitment and moral hazard to provide a unified view of labor market risk and asset prices. One of Ai and Bhandari (2018)'s key results is that firms with larger obligations to workers are associated with higher expected returns, because labor compensation delivers a form of operating leverage at the firm level.…”

“…4 The inalienability of human capital is essentially caused by limited commitment. Our paper is also related to the optimal contracting problem with limited commitment (see, e.g., Jermann, 2000, 2001;Albuquerque and Hopenhayn, 2004;Rampini and Viswanathan, 2013;Ai and Bhandari, 2018;Ai and Li, 2015;Bolton, Wang and Yang, 2018). Several papers in this literature study the asset pricing implications of limited commitment.…”

“…Recently, Ai and Bhandari (2018) provide a unified view of labor market risk and asset price through a general equilibrium model with two-sided limited commitment and moral hazard. Our paper is particularly related to Ai and Bhandari (2018) because both papers emphasize that firms offering larger labor compensation effectively bear higher operating leverage, which generates cross-sectional asset pricing implications. Our model adopts a different angle, however, by emphasizing compensation to key talents due to the ICC.…”

Inalienable Customer Capital, Corporate Liquidity, and Stock Returns

“…4 The inalienability of human capital essentially arises from limited commitment. Accordingly, our paper is also related to the optimal contracting problem with limited commitment (e.g., Jermann (2000, 2001), Albuquerque and Hopenhayn (2004), Rampini and Viswanathan (2013), Ai and Li (2015), Ai and Bhandari (2018), Bolton, Wang, and Yang (2019b)). Several papers in this literature study the asset pricing implications of limited commitment.…”