We study the role that investors and financial intermediaries can play in tackling the climate emergency. Our aim is to harness financial economic theory and data analytics to generate recommendations useful to regulators and practitioners. Our proposal consists in three projects: • Project 1 offers an economic theory of the impact of responsible investors. We characterise the optimal investment policy across sectors of socially responsible investors seeking impact. The analysis generates concrete recommendations.. • Project 2 is mainly experimental. The goal is to determine whether people, when they are investing, care about the ethical dimensions of the firms they buy. The aim is to understand the psychology of non-pecuniary preferences and how it affects firm valuations. • Project 3 is empirical. We study how informational shocks regarding a company’s environmental performance affect market forecasts of its future earnings at various time horizons. Our project in multidisciplinary in its approach: the research consortium spans skills in economic theory, data analysis, psychology.

Today, Europe faces a “crisis of values”. This crisis is related to the numerous challenges the European Union (“EU”) has faced in recent years – such as the sovereign debt crisis, the security crisis linked to the threat of terrorism, and the migration crisis. It has been characterized by a systemic deterioration in certain Member States of the EU’s founding values, such as democracy, the rule of law and the protection of fundamental rights. In particular, two Member States – Hungary and Poland – are experiencing a significant decline in the rule of law, which has involved the establishment of electoral autocracies that seek to undermine the limits on the exercise of executive power in order to maintain the dominant political party in power in the long term. Faced with the ineffectiveness of the political mechanisms intended to protect the rule of law in its Member States, the EU has developed a new strategy based on judicial and techno-managerial mechanisms. On the one hand, a number of preliminary references and infringement procedures that have been referred to the Court of Justice of the EU have found serious rule of law breaches in Hungary and Poland. Yet on the other hand, the EU has relied on instruments that were not specifically designed nor envisioned to protect the rule of law, such as the European Semester, the European Structural and Investment Funds, and the protection of EU’s financial interests. These mechanisms mainly pertain to the Economic and Monetary Union, cohesion policy and European fiscal policy, and rely on techno-managerial control mechanisms (indicators and scoreboards, benchmarking, peer reviews, etc.). While this new approach is likely to respond to criticisms regarding the lack of effectiveness of the Union's protection of the rule of law, it also raises some concerns. Firstly, the use of techno-managerial mechanisms is likely to undermine the constitutional balance of the Union by favouring, in particular, a management of the crisis of values by the European executive power and a marginalisation of parliamentary assemblies. Secondly, this new approach by the European Union could have the consequence that only those dimensions of the rule of law linked to economic and budgetary considerations will be effectively protected, to the detriment of other dimensions such as the rights of minorities, and thus, promote a conception of the rule of law that is not in compliance with international standards, such as those stemming from the Council of Europe. Using a pragmatic approach combined with an instrument-based approach and inductive reasoning, the MEDROI research project will critically analyse this new strategy. This has threefold-objective: (i) identify the techno-managerial control mechanisms mobilised by the EU alongside their effectiveness; (ii) analyse the consequences of this new approach for the protection of the rule of law within the EU; and (iii) assess the compatibility of this new approach by the EU with international standards for the protection of the rule of law. At the end of the two years covered by the project, MEDROI will mainly make it possible to identify the conception of the rule of law that is effectively produced by the EU through its new strategy, and to compare it with European and international standards for the protection of the rule of law; to assess the effectiveness of the protection of the rule of law in the EU; and to propose credible solutions to strengthen the protection of the rule of law in EU Member States.

The project "Financial Infrastructure: Risks and Regulation" aims at studying the new regulatory framework in the organization of exchanges between financial institutions, called financial infrastructure. Following the financial crisis of 2008, major reforms of the financial market infrastructure have been undertaken worldwide. The goal of these reforms, only partially implemented, is to enhance the stability of the financial system, thereby ensuring a better financing of the economies and preventing taxpayers from paying for the failure of financial institutions. Our main objective is to assess the effectiveness of these regulatory measures on the risk of the financial system. The G20 in Pittsburgh in 2009 have been pushing for profound changes in the organization of exchanges to correct two shortcomings that might have explained the amplitude of the crisis: first, the exchanges of non-standard assets, such as sub-primes, from the United States to most Western countries through unidentified chains of intermediaries (the so-called shadow banking); second, the complexity and opacity of contracts linking institutions, as those of Lehman Brothers. To limit and better control these arrangements, regulators have required the use of Central Counter-Parties (CCP) for most transactions involving derivative securities, and the mandatory report of all trades on derivatives through companies called Trade Repositories (TRs). Central counter-parties are thus called to play a crucial role in preventing market disruptions such as Lehman Brothers. Though, a new risk arises: all members of a Central counter-party are exposed to its failure, which could have dramatic effects on markets and macroeconomic stability. While the studies on exchanges are vast, central counter-parties have so far received very limited attention and important aspects of the regulation are still under discussion. Our project aims to be a significant step in a comprehensive analysis of the impact of the CCPs on the stability of the financial markets and ultimately on the financing of the economy. To achieve our objectives, we need to make progress on three intertwined topics on the financial institutions and infrastructures: their regulation, their strategic behaviours and the systemic risk these generate. To this end, the project is divided into three parts, which study respectively the management of risks by a CCP, the impact of CCPs on the financial institutions and trades and the competition and interdependencies between CCPs and their regulators. We expect our project to help to design resilient institutions and infrastructures, to promote research in financial economics, and to make accessible to a large audience the functioning of how the financial institutions operate to get a better understanding of the risks they cover and generate. The project brings together researchers in finance and economics, with both empirical and theoretical expertise.

The project F*STAR (Financial STAbility and the Real economy) is an extensive research program in the fields of financial economics and macro-finance. It focuses on the relationship between the funding policy of firms (both financials and non-financials) and the real economy. While funding of banks and corporations is an extremely broad topics, we will focus in this project on short-term funding. This type of funding corresponds to a large and growing fraction of the balance-sheet of banks and corporations and it is inherently seen as the most fragile source of funding. Furthermore, there is a direct and fundamental relationship between corporation funding and the real economy: Indeed a drop in funding leads to reduced investment, lower performance and negatively impacts employment and economic growth. While empirical investigations still remain scarce in academia because of lack of data on these over-the-counter debt markets, our empirical analyses will exploit unique data provided to us by the Banque de France. The F*STAR research team comprises seven researchers from HEC Paris, GREGHEC (CNRS UMR 2959), the Massachusetts Institute of Technology (USA), and Imperial College (UK). It combines experts from the fields of economics, banking, corporate finance, asset management, as well as regulation and spans both theory and empirics. The F*STAR project is divided into four subprojects or work packages, which capture various facets of the corporate funding market. Work package 1 - Stability of the Bank’s Wholesale Funding Market: In addition to deposits and central bank funding, commercial banks rely increasingly on financial markets (i.e., wholesale funding): interbank loans, repurchase agreements, and short-term debt securities sold to institutional investors. A prevailing view among economists and regulators is that wholesale funding is vulnerable to sudden stops, during which banks lose funding regardless of their credit quality. We will test empirically the resiliency of several segments of the wholesale funding market, as well as the effects of funding dry-ups on bank performance and on the macroeconomy. Work package 2 - Private Production of Safe Assets by Banks and Non-Financial Firms: Can claims on the private sector serve the role of safe assets? We will try to answer this question using high-frequency panel data on prices and quantities of European certificates of deposit (CD) issued by commercial banks, and commercial paper (CP) issued by non-financial institutions. We will measure the safety premium on all assets and study the joint-dynamics of privately-issued and government-issued safe assets. Work package 3 - Short-Term Debt Issuance of Non-Financial Firms: What is the rational for non-financial firms to massively use cash to repay their short-term debt at the end of the fiscal year? This phenomenon, which we will document for the first time in the literature, constitutes a puzzle for corporate finance theory as only net leverage, not gross leverage, is relevant to measure shareholders’ net wealth. We will investigate whether this pattern can be explained by a novel informational friction: asymmetric information between corporate insiders and outside financiers about the level of free cash holdings. Work package 4 - Theory of Collateral for Funding Markets: Why do some of the most developed debt markets rely so heavily on collateral? In this work package, we will theoretically explore the role of collateral in insulating creditors from the claims of other creditors, rather than from the actions of borrowers. This may imply that collateral should indeed be prevalent in environments where cash flow pledgeability is high, not low. Indeed, in such environments, taking on new debt is easier, leading creditors to require collateral as protection against debt dilution. We aim to develop a model based on that premise and explore its implications.

Information asymmetries pervade economic contexts. Job applicants know their ability better than employers, entrepreneurs have more information about their projects than banks, lobbyists are better informed about the scientific consensus around their issues than politicians, food producers understand the nutritional content of their products better than consumers. Our research plan is concerned with whether and how interested parties (employees, entrepreneurs, lobbyists, producers) communicate their private information to decision makers (employers, banks, politicians, consumers). The proposal involves various and complementary projects involving approaches from game-theory, behavioral economics and industrial organization. All projects, described below, aim at studying the role of bounded rationality and complex communication channels on the dissemination of information to decision-makers and in markets. 1. Information disclosure and the protection of naive consumers. We will study theoretically and experimentally disclosure games in which firms not only decide whether to disclose verifiable information, but also enjoy substantial flexibility in how information is disclosed to unsophisticated consumers. We will also consider disclosure games in which firms have multiple noisy signals about the quality of their products and can shape their disclosure strategies as a function of consumers' naivete. 2. Bounded rationality and psychological preferences in communication games. We will develop sender-receiver communication models in which the beliefs of the decision-maker directly enter his utility function. In this new theoretical framework, we will study the robustness of the unravelling result in voluntary disclosure games. We will also incorporate psychological preferences into cheap talk games and study the value of mediation and advice. 3. Credibility of Online Information. We will analyze the credibility of online product information. Our goal is to understand how the internet platform business model modifies the strategic disclosure of product information with a particular emphasis on the role of consumers as transmitters and acquirers of such information. 4. Dynamic and competitive information design. We will analyze long and competitive information design games between multiple information designers who want to influence the final action of a decision-maker. In particular, we will study how information designers react dynamically to the information policies of their competitors. The new models and results obtained in these projects will answer a number of questions: When is information credibly revealed to decision-makers? What is the quality of information that is produced and revealed by interested parties? How does a decision-maker's sophistication and preference affect strategic information revelation and efficiency? How does the vagueness of informed parties' disclosure impact on the decisions of naive decision-makers? What is the role of communication intermediaries to advise boundedly-rational decision-makers? As a next step, we will test some of our models' positive predictions in innovative laboratory experiments. Ultimately, our research promises to result in a better understanding of the role that policies, such as mandatory disclosure laws, mediation, third-party certification and consumer education, can play in improving information transmission and decisions. Keywords. Advertising; Bayesian persuasion; behavioral economics; bounded rationality; certification; cheap talk; concavification; consumers protection; credible communication; experimental economics; giving advice; information avoidance; information unravelling; information design; intermediaries; mediation; mandatory versus voluntary disclosure; noisy information; platforms; product information disclosure; psychological games; revelation principle; search goods; splitting games; statistical experiments; stochastic games.