Research

This study investigates the role of U.S. public pension funds in corporate bond markets, traditionally viewed as long-term investors in safe assets. Using novel data on security-level bond holdings and liability duration, I document that public pension funds exhibit a large duration mismatch and a tilt toward short-term bonds. I show that this pattern is driven by regulatory frictions that cause the regulatory funding ratio to diverge from the economic one. Because the regulatory discount rate is largely insulated from market interest rate movements, funds have little incentive to hedge interest rate risk but strong incentives to reach for yield, particularly through credit exposure. When the regulatory constraint becomes more binding, underfunded funds increase exposure to short-term and high-yield bonds at the expense of duration matching, resulting in lower risk-adjusted performance. A variance decomposition further shows that funding shortfalls are primarily driven by low, volatile investment returns and the persistence of low initial funding ratios.

In this paper, we examine how legal uncertainty affects economic activity. We develop a model that distinguishes between three types of legal uncertainty, classifying them as either idiosyn- cratic or systematic. We test the model’s predictions using micro-level data on bankruptcy judges and corporate loans in Korea. To compute time-varying court-level measures of legal uncertainty, we exploit random case assignment to judges and exogenous judge rotations in the judicial system. Our results show that firms are more likely to file for restructuring in courts with lower levels of legal uncertainty. We also find that higher levels of legal uncertainty result in smaller credit markets, primarily for high-risk firms. Our analysis further indicates that credit supply is less responsive to idiosyncratic legal uncertainty than credit demand since banks can diversify idiosyncratic legal uncertainty across borrowers