Most recent papers:

• Commodity Trade and the Carry Trade: A Tale of Two Countries.
  Robert Ready, Nikolai Roussanov, Colin Ward.
  The Journal of Finance. October 04, 2017
  Persistent interest rate differentials account for much of the currency carry trade profitability. “Commodity currencies” offer high interest rates on average, while countries that export finished goods tend to have low interest rates. We develop a general equilibrium model of international trade and currency pricing where countries have an advantage in producing either basic inputs or final goods. In the model, domestic production insulates commodity‐producing countries from global productivity shocks, forcing final‐good producers to absorb them. Commodity‐currency exchange rates and risk premia increase with productivity differentials and trade frictions. These predictions are strongly supported in the data.

  October 04, 2017   doi: 10.1111/jofi.12546   open full text
• How Do Quasi‐Random Option Grants Affect CEO Risk‐Taking?
  Kelly Shue, Richard R. Townsend.
  The Journal of Finance. October 04, 2017
  We examine how an increase in stock option grants affects CEO risk‐taking. The overall net effect of option grants is theoretically ambiguous for risk‐averse CEOs. To overcome the endogeneity of option grants, we exploit institutional features of multiyear compensation plans, which generate two distinct types of variation in the timing of when large increases in new at‐the‐money options are granted. We find that, given average grant levels during our sample period, a 10% increase in new options granted leads to a 2.8% to 4.2% increase in equity volatility. This increase in risk is driven largely by increased leverage.

  October 04, 2017   doi: 10.1111/jofi.12545   open full text
• Why Does Return Predictability Concentrate in Bad Times?
  Julien Cujean, Michael Hasler.
  The Journal of Finance. September 14, 2017
  We build an equilibrium model to explain why stock return predictability concentrates in bad times. The key feature is that investors use different forecasting models, and hence assess uncertainty differently. As economic conditions deteriorate, uncertainty rises and investors' opinions polarize. Disagreement thus spikes in bad times, causing returns to react to past news. This phenomenon creates a positive relation between disagreement and future returns. It also generates time‐series momentum, which strengthens in bad times, increases with disagreement, and crashes after sharp market rebounds. We provide empirical support for these new predictions.

  September 14, 2017   doi: 10.1111/jofi.12544   open full text
• Why Do Investors Hold Socially Responsible Mutual Funds?
  Arno Riedl, Paul Smeets.
  The Journal of Finance. September 14, 2017
  To understand why investors hold socially responsible mutual funds, we link administrative data to survey responses and behavior in incentivized experiments. We find that both social preferences and social signaling explain socially responsible investment (SRI) decisions. Financial motives play less of a role. Socially responsible investors in our sample expect to earn lower returns on SRI funds than on conventional funds and pay higher management fees. This suggests that investors are willing to forgo financial performance in order to invest in accordance with their social preferences.

  September 14, 2017   doi: 10.1111/jofi.12547   open full text
• The Macroeconomics of Shadow Banking.
  Alan Moreira, Alexi Savov.
  The Journal of Finance. August 28, 2017
  We build a macrofinance model of shadow banking—the transformation of risky assets into securities that are money‐like in quiet times but become illiquid when uncertainty spikes. Shadow banking economizes on scarce collateral, expanding liquidity provision, boosting asset prices and growth, but also building up fragility. A rise in uncertainty raises shadow banking spreads, forcing financial institutions to switch to collateral‐intensive funding. Shadow banking collapses, liquidity provision shrinks, liquidity premia and discount rates rise, asset prices and investment fall. The model generates slow recoveries, collateral runs, and flight‐to‐quality effects, and it sheds light on Large‐Scale Asset Purchases, Operation Twist, and other interventions.

  August 28, 2017   doi: 10.1111/jofi.12540   open full text
• On the Origins of Risk‐Taking in Financial Markets.
  Sandra E. Black, Paul J. Devereux, Petter Lundborg, Kaveh Majlesi.
  The Journal of Finance. August 28, 2017
  Financial investment behavior is highly correlated between parents and their children. Using Swedish data, we find that the decision of adoptees to hold equities is associated with the behavior of both biological and adoptive parents, implying a role for both genetic and environmental influences. However, we find that nurture has a stronger influence on the share of financial assets invested in equities and on portfolio volatility, suggesting that financial risk‐taking is substantially environmentally determined. The parental investment variables substantially increase the explanatory power of cross‐sectional regressions and so may play an important role in understanding cross‐sectional heterogeneity in investment behavior.

  August 28, 2017   doi: 10.1111/jofi.12521   open full text
• Consumer Ruthlessness and Mortgage Default during the 2007 to 2009 Housing Bust.
  Neil Bhutta, Jane Dokko, Hui Shan.
  The Journal of Finance. August 28, 2017
  From 2007 to 2009 U.S. house prices plunged and mortgage defaults surged. While ostensibly consistent with widespread “ruthless default,” analysis of detailed mortgage and house price data indicates that borrowers do not walk away until they are deeply underwater—far deeper than traditional models predict. The evidence suggests that lender recourse is not the major driver of this result. We argue that emotional and behavioral factors play an important role in decisions to continue paying. Borrower reluctance to walk away implies that the moral hazard cost of default as a form of social insurance may be lower than suspected.

  August 28, 2017   doi: 10.1111/jofi.12523   open full text
• Matching Capital and Labor.
  Jonathan B. Berk, Jules H. Binsbergen, Binying Liu.
  The Journal of Finance. August 28, 2017
  We establish an important role for the firm by studying capital reallocation decisions of mutual fund firms. The firm's decision to reallocate capital among its mutual fund managers adds at least $474,000 a month, which amounts to over 30% of the total value added of the industry. We provide evidence that this additional value added results from the firm's private information about the skill of its managers. The firm captures this value because investors reward the firm following a capital reallocation decision by allocating additional capital to the firm's funds.

  August 28, 2017   doi: 10.1111/jofi.12542   open full text
• Nonfundamental Speculation Revisited.
  Liyan Yang, Haoxiang Zhu.
  The Journal of Finance. August 28, 2017
  We show that a linear pure strategy equilibrium may not exist in the model of Madrigal (1996), contrary to the claim of the original paper. This is because Madrigal's characterization of a pure strategy equilibrium omits a second‐order condition. If the nonfundamental speculator's information about noise trading is sufficiently precise, a linear pure strategy equilibrium fails to exist. In parameter regions where a pure strategy equilibrium does exist, we identify a few calculation errors in Madrigal (1996) that result in misleading implications.

  August 28, 2017   doi: 10.1111/jofi.12548   open full text
• Firm Investment and Stakeholder Choices: A Top‐Down Theory of Capital Budgeting.
  Andres Almazan, Zhaohui Chen, Sheridan Titman.
  The Journal of Finance. August 18, 2017
  This paper develops a top‐down model of capital budgeting in which privately informed executives make investment choices that convey information to the firm's stakeholders (e.g., employees). Favorable information in this setting encourages stakeholders to take actions that positively contribute to the firm's success (e.g., employees work harder). Within this framework we examine how firms may distort their investment choices to influence the information conveyed to stakeholders and show that investment rigidities and overinvestment can arise as optimal investment distortions. We also examine investment distortions in multi‐divisional firms and compare such distortions to those in single‐division firms.

  August 18, 2017   doi: 10.1111/jofi.12526   open full text
• Presidential Address: The Scientific Outlook in Financial Economics.
  Campbell R. Harvey.
  The Journal of Finance. August 14, 2017
  ABSTRACT Given the competition for top journal space, there is an incentive to produce “significant” results. With the combination of unreported tests, lack of adjustment for multiple tests, and direct and indirect p‐hacking, many of the results being published will fail to hold up in the future. In addition, there are basic issues with the interpretation of statistical significance. Increasing thresholds may be necessary, but still may not be sufficient: if the effect being studied is rare, even t > 3 will produce a large number of false positives. Here I explore the meaning and limitations of a p‐value. I offer a simple alternative (the minimum Bayes factor). I present guidelines for a robust, transparent research culture in financial economics. Finally, I offer some thoughts on the importance of risk‐taking (from the perspective of authors and editors) to advance our field. SUMMARY Empirical research in financial economics relies too much on p‐values, which are poorly understood in the first place. Journals want to publish papers with positive results and this incentivizes researchers to engage in data mining and “p‐hacking.” The outcome will likely be an embarrassing number of false positives—effects that will not be repeated in the future. The minimum Bayes factor (which is a function of the p‐value) combined with prior odds provides a simple solution that can be reported alongside the usual p‐value. The Bayesianized p‐value answers the question: What is the probability that the null is true? The same technique can be used to answer: What threshold of t‐statistic do I need so that there is only a 5% chance that the null is true? The threshold depends on the economic plausibility of the hypothesis.

  August 14, 2017   doi: 10.1111/jofi.12530   open full text
• A Model of Monetary Policy and Risk Premia.
  Itamar Drechsler, Alexi Savov, Philipp Schnabl.
  The Journal of Finance. July 26, 2017
  We develop a dynamic asset pricing model in which monetary policy affects the risk premium component of the cost of capital. Risk‐tolerant agents (banks) borrow from risk‐averse agents (i.e., take deposits) to fund levered investments. Leverage exposes banks to funding risk, which they insure by holding liquidity buffers. By changing the nominal rate the central bank influences the liquidity premium, and hence the cost of taking leverage. Lower nominal rates make liquidity cheaper and raise leverage, resulting in lower risk premia and higher asset prices, volatility, investment, and growth. We analyze forward guidance, a “Greenspan put,” and the yield curve.

  July 26, 2017   doi: 10.1111/jofi.12539   open full text
• The Front Men of Wall Street: The Role of CDO Collateral Managers in the CDO Boom and Bust.
  Sergey Chernenko.
  The Journal of Finance. July 18, 2017
  I study the incentives of the collateral managers who selected securities for ABS CDOs—securitizations that figured prominently in the financial crisis. Specialized managers without other businesses that could suffer negative reputational consequences invested in low‐quality securities underwritten by the CDO's arranger. These securities performed significantly worse than observationally similar securities. Managers investing in these securities were rewarded with additional collateral management assignments. Diversified managers who did assemble CDOs suffered negative reputational consequences during the crisis: institutional investors withdrew from their mutual funds. Overall, the results are consistent with a quid pro quo between collateral managers and CDO underwriters.

  July 18, 2017   doi: 10.1111/jofi.12520   open full text
• Are CDS Auctions Biased and Inefficient?
  Songzi Du, Haoxiang Zhu.
  The Journal of Finance. July 18, 2017
  We study the design of credit default swaps (CDS) auctions, which determine the payments by CDS sellers to CDS buyers following defaults of bonds. Using a simple model, we find that the current design of CDS auctions leads to biased prices and inefficient allocations. This is because various restrictions imposed in CDS auctions prevent certain investors from participating in the price discovery and allocation process. The imposition of a price cap or floor also gives dealers large influence on the final auction price. We propose an alternative double auction design that delivers more efficient price discovery and allocations.

  July 18, 2017   doi: 10.1111/jofi.12541   open full text
• Benchmarks in Search Markets.
  Darrell Duffie, Piotr Dworczak, Haoxiang Zhu.
  The Journal of Finance. July 10, 2017
  We characterize the role of benchmarks in price transparency of over‐the‐counter markets. A benchmark can raise social surplus by increasing the volume of beneficial trade, facilitating more efficient matching between dealers and customers, and reducing search costs. Although the market transparency promoted by benchmarks reduces dealers' profit margins, dealers may nonetheless introduce a benchmark to encourage greater market participation by investors. Low‐cost dealers may also introduce a benchmark to increase their market share relative to high‐cost dealers. We construct a revelation mechanism that maximizes welfare subject to search frictions, and show conditions under which it coincides with announcing the benchmark.

  July 10, 2017   doi: 10.1111/jofi.12525   open full text
• The Downside of Asset Screening for Market Liquidity.
  Victoria Vanasco.
  The Journal of Finance. July 10, 2017
  This paper explores the tension between asset quality and market liquidity. I model an originator who screens assets whose cash flows are later sold in secondary markets. Screening improves asset quality but gives rise to asymmetric information, hindering trade of the asset cash flows. In the optimal mechanism (second‐best), costly retention of cash flows is essential to implement asset screening. Market allocations can feature too much or too little screening relative to second‐best, where too much screening generates inefficiently illiquid markets. Furthermore, the economy is prone to multiple equilibria. The optimal mechanism is decentralized with two tools: retention rules and transfers.

  July 10, 2017   doi: 10.1111/jofi.12519   open full text
• Do Cash Flows of Growth Stocks Really Grow Faster?
  Huafeng (Jason) Chen.
  The Journal of Finance. June 20, 2017
  Contrary to conventional wisdom, growth stocks (i.e., low book‐to‐market stocks) do not have substantially higher future cash‐flow growth rates than value stocks, in both rebalanced and buy‐and‐hold portfolios. Efficiency growth, survivorship and look‐back biases, and the rebalancing effect help explain the results. These findings suggest that duration alone is unlikely to explain the value premium.

  June 20, 2017   doi: 10.1111/jofi.12518   open full text
• Selling Failed Banks.
  João Granja, Gregor Matvos, Amit Seru.
  The Journal of Finance. June 20, 2017
  The average FDIC loss from selling a failed bank is 28% of assets. We document that failed banks are predominantly sold to bidders within the same county, with similar assets business lines, when these bidders are well capitalized. Otherwise, they are acquired by less similar banks located further away. We interpret these facts within a model of auctions with budget constraints, in which poor capitalization of some potential acquirers drives a wedge between their willingness and ability to pay for failed banks. We document that this wedge drives misallocation, and partially explains the FDIC losses from failed bank sales.

  June 20, 2017   doi: 10.1111/jofi.12512   open full text
• What Drives the Cross‐Section of Credit Spreads?: A Variance Decomposition Approach.
  Yoshio Nozawa.
  The Journal of Finance. June 20, 2017
  I decompose the variation of credit spreads for corporate bonds into changing expected returns and changing expectation of credit losses. Using a log‐linearized pricing identity and a vector autoregression applied to microlevel data from 1973 to 2011, I find that expected returns contribute to the cross‐sectional variance of credit spreads nearly as much as expected credit loss does. However, most of the time‐series variation in credit spreads for the market portfolio corresponds to risk premiums.

  June 20, 2017   doi: 10.1111/jofi.12524   open full text
• Consumer Default, Credit Reporting, and Borrowing Constraints.
  Mark J. Garmaise, Gabriel Natividad.
  The Journal of Finance. June 20, 2017
  Why do negative credit events lead to long‐term borrowing constraints? Exploiting banking regulations in Peru and utilizing currency movements, we show that consumers who face a credit rating downgrade due to bad luck experience a three‐year reduction in financing. Consumers respond to the shock by paying down their most troubled loans, but nonetheless end up more likely to exit the credit market. For a set of borrowers who experience severe delinquency, we find that the associated credit reporting downgrade itself accounts for 25% to 65% of their observed decline in borrowing at various horizons over the following several years.

  June 20, 2017   doi: 10.1111/jofi.12522   open full text
• Municipal Bond Liquidity and Default Risk.
  Michael Schwert.
  The Journal of Finance. June 13, 2017
  This paper examines the pricing of municipal bonds. I use three distinct, complementary approaches to decompose municipal bond spreads into default and liquidity components, and find that default risk accounts for 74% to 84% of the average spread after adjusting for tax‐exempt status. The first approach estimates the liquidity component using transaction data, the second measures the default component with credit default swap data, and the third is a quasi‐natural experiment that estimates changes in default risk around pre‐refunding events. The price of default risk is high given the rare incidence of municipal default and implies a high risk premium.

  June 13, 2017   doi: 10.1111/jofi.12511   open full text
• A Labor Capital Asset Pricing Model.
  Lars‐Alexander Kuehn, Mikhail Simutin, Jessie Jiaxu Wang.
  The Journal of Finance. June 05, 2017
  We show that labor search frictions are an important determinant of the cross‐section of equity returns. Empirically, we find that firms with low loadings on labor market tightness outperform firms with high loadings by 6% annually. We propose a partial equilibrium labor market model in which heterogeneous firms make dynamic employment decisions under labor search frictions. In the model, loadings on labor market tightness proxy for priced time‐variation in the efficiency of the aggregate matching technology. Firms with low loadings are more exposed to adverse matching efficiency shocks and require higher expected stock returns.

  June 05, 2017   doi: 10.1111/jofi.12504   open full text
• Trader Leverage and Liquidity.
  Bige Kahraman, Heather E. Tookes.
  The Journal of Finance. June 05, 2017
  Does trader leverage drive equity market liquidity? We use the unique features of the margin trading system in India to identify a causal relationship between traders’ ability to borrow and a stock's market liquidity. To quantify the impact of trader leverage, we employ a regression discontinuity design that exploits threshold rules that determine a stock's margin trading eligibility. We find that liquidity is higher when stocks become eligible for margin trading and that this liquidity enhancement is driven by margin traders’ contrarian strategies. Consistent with downward liquidity spirals due to deleveraging, we also find that this effect reverses during crises.

  June 05, 2017   doi: 10.1111/jofi.12507   open full text
• Financial Transaction Taxes, Market Composition, and Liquidity.
  Jean‐Edouard Colliard, Peter Hoffmann.
  The Journal of Finance. June 05, 2017
  We use the introduction of a financial transaction tax (FTT) in France in 2012 to test competing theories on its impact. We find no support for the idea that an FTT improves market quality by affecting the composition of trading volume. Instead, our results are in line with the hypothesis that a lower trading volume reduces liquidity and in turn market quality. Consistent with theories of asset pricing under transaction costs, we document a shift in security holdings from short‐term to long‐term investors. Finally, we find that moderate aggregate effects on market quality can mask large adjustments made by individual agents.

  June 05, 2017   doi: 10.1111/jofi.12510   open full text
• Income Insurance and the Equilibrium Term Structure of Equity.
  Roberto Marfè.
  The Journal of Finance. June 05, 2017
  Output, wages, and dividends feature term structures of variance ratios that are respectively flat, increasing, and decreasing. Income insurance from shareholders to workers explains these term structures. Risk‐sharing smooths wages but only concerns transitory risk and hence enhances short‐run dividend risk. As a result, actual labor‐share variation largely forecasts the risk, premium, and slope of dividend strips. A simple general equilibrium model in which labor rigidity affects dividend dynamics and the price of short‐run risk reconciles standard asset pricing facts with the term structures of the equity premium, volatility, and macroeconomic variables, which are at odds in leading models.

  June 05, 2017   doi: 10.1111/jofi.12508   open full text
• Retail Financial Advice: Does One Size Fit All?
  Stephen Foerster, Juhani T. Linnainmaa, Brian T. Melzer, Alessandro Previtero.
  The Journal of Finance. May 25, 2017
  Using unique data on Canadian households, we show that financial advisors exert substantial influence over their clients' asset allocation, but provide limited customization. Advisor fixed effects explain considerably more variation in portfolio risk and home bias than a broad set of investor attributes that includes risk tolerance, age, investment horizon, and financial sophistication. Advisor effects remain important even when controlling flexibly for unobserved heterogeneity through investor fixed effects. An advisor's own asset allocation strongly predicts the allocations chosen on clients' behalf. This one‐size‐fits‐all advice does not come cheap: advised portfolios cost 2.5% per year, or 1.5% more than life cycle funds.

  May 25, 2017   doi: 10.1111/jofi.12514   open full text
• Volatility‐Managed Portfolios.
  Alan Moreira, Tyler Muir.
  The Journal of Finance. May 15, 2017
  Managed portfolios that take less risk when volatility is high produce large alphas, increase Sharpe ratios, and produce large utility gains for mean‐variance investors. We document this for the market, value, momentum, profitability, return on equity, investment, and betting‐against‐beta factors, as well as the currency carry trade. Volatility timing increases Sharpe ratios because changes in volatility are not offset by proportional changes in expected returns. Our strategy is contrary to conventional wisdom because it takes relatively less risk in recessions. This rules out typical risk‐based explanations and is a challenge to structural models of time‐varying expected returns.

  May 15, 2017   doi: 10.1111/jofi.12513   open full text
• Do Funds Make More When They Trade More?
  ľuboš Pástor, Robert F. Stambaugh, Lucian A. Taylor.
  The Journal of Finance. May 15, 2017
  We model fund turnover in the presence of time‐varying profit opportunities. Our model predicts a positive relation between an active fund's turnover and its subsequent benchmark‐adjusted return. We find such a relation for equity mutual funds. This time‐series relation between turnover and performance is stronger than the cross‐sectional relation, as the model predicts. Also as predicted, the turnover‐performance relation is stronger for funds trading less‐liquid stocks and funds likely to possess greater skill. Turnover is correlated across funds. The common component of turnover is positively correlated with proxies for stock mispricing. Turnover of similar funds helps predict a fund's performance.

  May 15, 2017   doi: 10.1111/jofi.12509   open full text
• Advance Refundings of Municipal Bonds.
  Andrew Ang, Richard C. Green, Francis A. Longstaff, Yuhang Xing.
  The Journal of Finance. May 15, 2017
  The advance refunding of debt is a widespread practice in municipal finance. In an advance refunding, municipalities retire callable bonds early and refund them with bonds with lower coupon rates. We find that 85% of all advance refundings occur at a net present value loss, and that the aggregate losses over the past 20 years exceed $15 billion. We explore why municipalities advance refund their debt at loss. Financially constrained municipalities may face pressure to advance refund since it allows them to reduce short‐term cash outflows. We find strong evidence that financial constraints are a major driver of advance refunding activity.

  May 15, 2017   doi: 10.1111/jofi.12506   open full text
• Term Structure of Consumption Risk Premia in the Cross Section of Currency Returns.
  Irina Zviadadze.
  The Journal of Finance. May 15, 2017
  I relate the downward‐sloping term structure of currency carry returns to compensation for currency exposures to macroeconomic risk embedded in the joint dynamics of U.S. consumption, inflation, nominal interest rate, and their stochastic variance. The interest rate and inflation shocks play a prominent role. Higher yield currencies exhibit higher multiperiod exposures to these shocks. The prices of these risk exposures are positive and sizeable across all investment horizons. The interest rate shock is qualitatively similar to the long‐run risk of Bansal and Yaron.

  May 15, 2017   doi: 10.1111/jofi.12501   open full text
• Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis.
  Karl V. Lins, Henri Servaes, Ane Tamayo.
  The Journal of Finance. May 09, 2017
  During the 2008–2009 financial crisis, firms with high social capital, as measured by corporate social responsibility (CSR) intensity, had stock returns that were four to seven percentage points higher than firms with low social capital. High‐CSR firms also experienced higher profitability, growth, and sales per employee relative to low‐CSR firms, and they raised more debt. This evidence suggests that the trust between a firm and both its stakeholders and investors, built through investments in social capital, pays off when the overall level of trust in corporations and markets suffers a negative shock.

  May 09, 2017   doi: 10.1111/jofi.12505   open full text
• Forced Asset Sales and the Concentration of Outstanding Debt: Evidence from the Mortgage Market.
  Giovanni Favara, Mariassunta Giannetti.
  The Journal of Finance. May 05, 2017
  We provide evidence that lenders differ in their ex post incentives to internalize price‐default externalities associated with the liquidation of collateralized debt. Using the mortgage market as a laboratory, we conjecture that lenders with a large share of outstanding mortgages on their balance sheets internalize the negative spillovers associated with the liquidation of defaulting mortgages and thus are less inclined to foreclose. We provide evidence consistent with our conjecture. Arguably as a consequence, zip codes with a higher concentration of outstanding mortgages experience smaller house prices declines. These results are not driven by unobservable zip code or lender characteristics.

  May 05, 2017   doi: 10.1111/jofi.12494   open full text
• Finance and Growth at the Firm Level: Evidence from SBA Loans.
  J. David Brown, John S. Earle.
  The Journal of Finance. May 03, 2017
  We analyze linked databases on all SBA loans and lenders and on all U.S. employers to estimate the effects of financial access on employment growth. Estimation exploits the long panels and variation in local availability of SBA‐intensive lenders. The results imply an increase of 3–3.5 jobs for each million dollars of loans, suggesting real effects of credit constraints. Estimated impacts are stronger for younger and larger firms and when local credit conditions are weak, but we find no clear evidence of cyclical variation. We estimate taxpayer costs per job created in the range of $21,000–$25,000.

  May 03, 2017   doi: 10.1111/jofi.12492   open full text
• Capital Account Liberalization and Aggregate Productivity: The Role of Firm Capital Allocation.
  Mauricio Larrain, Sebastian Stumpner.
  The Journal of Finance. May 02, 2017
  We study the effects of capital account liberalization on firm capital allocation and aggregate productivity in 10 Eastern European countries. Using a large firm‐level data set, we show that capital account liberalization decreases the dispersion in the return to capital across firms, particularly in sectors more dependent on external finance. We provide evidence that capital account liberalization improves capital allocation by allowing financially constrained firms to demand more capital and produce at a more efficient level. Finally, using a model of misallocation we document that capital account liberalization increases aggregate productivity through more efficient capital allocation by 10% to 16%.

  May 02, 2017   doi: 10.1111/jofi.12497   open full text
• The Effect of Housing on Portfolio Choice.
  Raj Chetty, László Sándor, Adam Szeidl.
  The Journal of Finance. April 21, 2017
  We show that characterizing the effects of housing on portfolios requires distinguishing between the effects of home equity and mortgage debt. We isolate exogenous variation in home equity and mortgages by using differences across housing markets in house prices and housing supply elasticities as instruments. Increases in property value (holding home equity constant) reduce stockholdings, while increases in home equity wealth (holding property value constant) raise stockholdings. The stock share of liquid wealth would rise by 1 percentage point—6% of the mean stock share—if a household were to spend 10% less on its house, holding fixed wealth.

  April 21, 2017   doi: 10.1111/jofi.12500   open full text
• The Flash Crash: High‐Frequency Trading in an Electronic Market.
  Andrei Kirilenko, Albert S. Kyle, Mehrdad Samadi, Tugkan Tuzun.
  The Journal of Finance. April 21, 2017
  We study intraday market intermediation in an electronic market before and during a period of large and temporary selling pressure. On May 6, 2010, U.S. financial markets experienced a systemic intraday event—the Flash Crash—where a large automated selling program was rapidly executed in the E‐mini S&P 500 stock index futures market. Using audit trail transaction‐level data for the E‐mini on May 6 and the previous three days, we find that the trading pattern of the most active nondesignated intraday intermediaries (classified as High‐Frequency Traders) did not change when prices fell during the Flash Crash.

  April 21, 2017   doi: 10.1111/jofi.12498   open full text
• Does the Scope of the Sell‐Side Analyst Industry Matter? An Examination of Bias, Accuracy, and Information Content of Analyst Reports.
  Kenneth Merkley, Roni Michaely, Joseph Pacelli.
  The Journal of Finance. April 21, 2017
  We examine changes in the scope of the sell‐side analyst industry and whether these changes impact information dissemination and the quality of analysts’ reports. Our findings suggest that changes in the number of analysts covering an industry impact analyst competition and have significant spillover effects on other analysts’ forecast accuracy, bias, report informativeness, and effort. These spillover industry effects are incremental to the effects of firm level changes in analyst coverage. Overall, a more significant sell‐side analyst industry presence has positive externalities that can result in better functioning capital markets.

  April 21, 2017   doi: 10.1111/jofi.12485   open full text
• Short‐Term Market Risks Implied by Weekly Options.
  Torben G. Andersen, Nicola Fusari, Viktor Todorov.
  The Journal of Finance. April 13, 2017
  We study short‐maturity (“weekly”) S&P 500 index options, which provide a direct way to analyze volatility and jump risks. Unlike longer‐dated options, they are largely insensitive to the risk of intertemporal shifts in the economic environment. Adopting a novel seminonparametric approach, we uncover variation in the negative jump tail risk, which is not spanned by market volatility and helps predict future equity returns. As such, our approach allows for easy identification of periods of heightened concerns about negative tail events that are not always “signaled” by the level of market volatility and elude standard asset pricing models.

  April 13, 2017   doi: 10.1111/jofi.12486   open full text
• Correlated Default and Financial Intermediation.
  Gregory Phelan.
  The Journal of Finance. April 13, 2017
  Financial intermediation naturally arises when knowing how loan payoffs are correlated is valuable for managing investments but lenders cannot easily observe that relationship. I show this result using a costly enforcement model in which lenders need ex post incentives to enforce payments from defaulted loans and borrowers' payoffs are correlated. When projects have correlated outcomes, learning the state of one project (via enforcement) provides information about the states of other projects. A large correlated portfolio provides ex post incentives for enforcement. Thus, intermediation dominates direct lending, and intermediaries are financed with risk‐free deposits, earn positive profits, and hold systemic default risk.

  April 13, 2017   doi: 10.1111/jofi.12493   open full text
• Liquidity in a Market for Unique Assets: Specified Pool and To‐Be‐Announced Trading in the Mortgage‐Backed Securities Market.
  Pengjie Gao, Paul Schultz, Zhaogang Song.
  The Journal of Finance. April 13, 2017
  Agency mortgage‐backed securities (MBS) trade simultaneously in a market for specified pools (SPs) and in the to‐be‐announced (TBA) forward market. TBA trading creates liquidity by allowing thousands of different MBS to be traded in a handful of TBA contracts. SPs that are eligible to be traded as TBAs have significantly lower trading costs than other SPs. We present evidence that TBA eligibility, in addition to characteristics of TBA‐eligible SPs, lowers trading costs. We show that dealers hedge SP inventory with TBA trades, and they are more likely to prearrange trades in SPs that are difficult to hedge.

  April 13, 2017   doi: 10.1111/jofi.12496   open full text
• Exchange Rates and Monetary Policy Uncertainty.
  Philippe Mueller, Alireza Tahbaz‐Salehi, Andrea Vedolin.
  The Journal of Finance. April 13, 2017
  We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We show that these excess returns (i) are higher for currencies with higher interest rate differentials vis‐à‐vis the United States, (ii) increase with uncertainty about monetary policy, and (iii) increase further when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.

  April 13, 2017   doi: 10.1111/jofi.12499   open full text
• Firm Age, Investment Opportunities, and Job Creation.
  Manuel Adelino, Song Ma, David Robinson.
  The Journal of Finance. April 13, 2017
  New firms are an important source of job creation, but the underlying economic mechanisms for why this is so are not well understood. Using an identification strategy that links shocks to local income to job creation in the nontradable sector, we ask whether job creation arises more through new firm creation or through the expansion of existing firms. We find that new firms account for the bulk of net employment creation in response to local investment opportunities. We also find significant gross job creation and destruction by existing firms, suggesting that positive local shocks accelerate churn.

  April 13, 2017   doi: 10.1111/jofi.12495   open full text
• Reverse Mortgage Loans: A Quantitative Analysis.
  Makoto Nakajima, Irina A. Telyukova.
  The Journal of Finance. March 21, 2017
  Reverse mortgage loans (RMLs) allow older homeowners to borrow against housing wealth without moving. Despite rapid growth in this market, only 1.9% of eligible homeowners had RMLs in 2013. In this paper, we analyze reverse mortgages in a calibrated life‐cycle model of retirement. The average welfare gain from RMLs is $252 per homeowner, and $1,770 per RML borrower. Bequest motives, uncertainty about health and expenses, and loan costs account for low demand. According to the model, the Great Recession's impact differs across age, income, and wealth distributions, with a threefold increase in RML demand for lowest income and oldest households.

  March 21, 2017   doi: 10.1111/jofi.12489   open full text
• On the Foundations of Corporate Social Responsibility.
  Hao Liang, Luc Renneboog.
  The Journal of Finance. March 21, 2017
  Using corporate social responsibility (CSR) ratings for 23,000 companies from 114 countries, we find that a firm's CSR rating and its country's legal origin are strongly correlated. Legal origin is a stronger explanation than “doing good by doing well” factors or firm and country characteristics (ownership concentration, political institutions, and globalization): firms from common law countries have lower CSR than companies from civil law countries, with Scandinavian civil law firms having the highest CSR ratings. Evidence from quasi‐natural experiments such as scandals and natural disasters suggests that civil law firms are more responsive to CSR shocks than common law firms.

  March 21, 2017   doi: 10.1111/jofi.12487   open full text
• Precautionary Savings with Risky Assets: When Cash Is Not Cash.
  Ran Duchin, Thomas Gilbert, Jarrad Harford, Christopher Hrdlicka.
  The Journal of Finance. March 21, 2017
  U.S. industrial firms invest heavily in noncash, risky financial assets such as corporate debt, equity, and mortgage‐backed securities. Risky assets represent 40% of firms’ financial portfolios, or 6% of total book assets. We present a formal model to assess the optimality of this behavior. Consistent with the model, risky assets are concentrated in financially unconstrained firms holding large financial portfolios, are held by poorly governed firms, and are discounted by 13% to 22% compared to safe assets. We conclude that this activity represents an unregulated asset management industry of more than $1.5 trillion, questioning the traditional boundaries of nonfinancial firms.

  March 21, 2017   doi: 10.1111/jofi.12490   open full text
• Before an Analyst Becomes an Analyst: Does Industry Experience Matter?
  Daniel Bradley, Sinan Gokkaya, Xi Liu.
  The Journal of Finance. March 21, 2017
  Using hand‐collected biographical information on financial analysts from 1983 to 2011, we find that analysts making forecasts on firms in industries related to their preanalyst experience have better forecast accuracy, evoke stronger market reactions to earning revisions, and are more likely to be named Institutional Investor all‐stars. Plausibly exogenous losses of analysts with related industry experience have real financial market implications—changes in firms’ information asymmetry and price reactions are significantly larger than those of other analysts. Overall, industry expertise acquired from preanalyst work experience is valuable to analysts, consistent with the emphasis placed on their industry knowledge by institutional investors.

  March 21, 2017   doi: 10.1111/jofi.12466   open full text
• Asset Market Participation and Portfolio Choice over the Life‐Cycle.
  Andreas Fagereng, Charles Gottlieb, Luigi Guiso.
  The Journal of Finance. March 21, 2017
  Using error‐free data on life‐cycle portfolio allocations of a large sample of Norwegian households, we document a double adjustment as households age: a rebalancing of the portfolio composition away from stocks as they approach retirement and stock market exit after retirement. When structurally estimating an extended life‐cycle model, the parameter combination that best fits the data is one with a relatively large risk aversion, a small per‐period participation cost, and a yearly probability of a large stock market loss in line with the frequency of stock market crashes in Norway.

  March 21, 2017   doi: 10.1111/jofi.12484   open full text
• Linear‐Rational Term Structure Models.
  Damir Filipović, Martin Larsson, Anders B. Trolle.
  The Journal of Finance. March 21, 2017
  We introduce the class of linear‐rational term structure models in which the state price density is modeled such that bond prices become linear‐rational functions of the factors. This class is highly tractable with several distinct advantages: (i) ensures nonnegative interest rates, (ii) easily accommodates unspanned factors affecting volatility and risk premiums, and (iii) admits semi‐analytical solutions to swaptions. A parsimonious model specification within the linear‐rational class has a very good fit to both interest rate swaps and swaptions since 1997 and captures many features of term structure, volatility, and risk premium dynamics—including when interest rates are close to the zero lower bound.

  March 21, 2017   doi: 10.1111/jofi.12488   open full text
• Bank Leverage and Monetary Policy's Risk‐Taking Channel: Evidence from the United States.
  Giovanni Dell'ariccia, Luc Laeven, Gustavo A. Suarez.
  The Journal of Finance. March 21, 2017
  We present evidence of a risk‐taking channel of monetary policy for the U.S. banking system. We use confidential data on banks’ internal ratings on loans to businesses over the period 1997 to 2011 from the Federal Reserve's Survey of Terms of Business Lending. We find that ex ante risk‐taking by banks (measured by the risk rating of new loans) is negatively associated with increases in short‐term interest rates. This relationship is more pronounced in regions that are less in sync with the nationwide business cycle, and less pronounced for banks with relatively low capital or during periods of financial distress.

  March 21, 2017   doi: 10.1111/jofi.12467   open full text
• Mortgage Debt Overhang: Reduced Investment by Homeowners at Risk of Default.
  Brian T. Melzer.
  The Journal of Finance. March 21, 2017
  Homeowners at risk of default face a debt overhang that reduces their incentive to invest in their property: in expectation, some value created by investments in the property will go to the lender. This agency conflict affects housing investments. Homeowners at risk of default cut back substantially on home improvements and mortgage principal payments, even when they appear financially unconstrained. Meanwhile, they do not reduce spending on assets that they may retain in default, including home appliances, furniture, and vehicles. These findings highlight an important financial friction that has stifled housing investment since the Great Recession.

  March 21, 2017   doi: 10.1111/jofi.12482   open full text
• Politically Connected Private Equity and Employment.
  Mara Faccio, Hung‐Chia Hsu.
  The Journal of Finance. March 21, 2017
  We investigate the employment consequences of private equity buyouts. We find evidence of higher job creation, on average, at the establishments operated by targets of politically connected private equity firms than at those operated by targets of nonconnected private equity firms. Consistent with an exchange of favors story, establishments operated by targets of politically connected private equity firms increase employment more during election years and in states with high levels of corruption. In additional analyses, we provide evidence of specific benefits experienced by target firms from their political connections. Our results are robust to tests designed to mitigate selection concerns.

  March 21, 2017   doi: 10.1111/jofi.12483   open full text
• Attracting Early‐Stage Investors: Evidence from a Randomized Field Experiment.
  Shai Bernstein, Arthur Korteweg, Kevin Laws.
  The Journal of Finance. March 21, 2017
  This paper uses a randomized field experiment to identify which start‐up characteristics are most important to investors in early‐stage firms. The experiment randomizes investors’ information sets of fund‐raising start‐ups. The average investor responds strongly to information about the founding team, but not to firm traction or existing lead investors. We provide evidence that the team is not merely a signal of quality, and that investing based on team information is a rational strategy. Together, our results indicate that information about human assets is causally important for the funding of early‐stage firms and hence for entrepreneurial success.

  March 21, 2017   doi: 10.1111/jofi.12470   open full text
• Resident Networks and Corporate Connections: Evidence from World War II Internment Camps.
  Lauren Cohen, Umit G. Gurun, Christopher Malloy.
  The Journal of Finance. January 12, 2017
  Using customs and port authority data, we show that firms are significantly more likely to trade with countries that have a large resident population near their firm headquarters, and that these connected trades are their most valuable international trades. Using the formation of World War II Japanese internment camps to isolate exogenous shocks to local ethnic populations, we identify a causal link between local networks and firm trade. Firms are also more likely to acquire target firms, and report increased segment sales, in connected countries. Our results point to a surprisingly large role of immigrants as economic conduits for firms.

  January 12, 2017   doi: 10.1111/jofi.12407   open full text
• What Doesn't Kill You Will Only Make You More Risk‐Loving: Early‐Life Disasters and CEO Behavior.
  Gennaro Bernile, Vineet Bhagwat, P. Raghavendra Rau.
  The Journal of Finance. January 12, 2017
  The literature on managerial style posits a linear relation between a chief executive officer's (CEOs) past experiences and firm risk. We show that there is a nonmonotonic relation between the intensity of CEOs’ early‐life exposure to fatal disasters and corporate risk‐taking. CEOs who experience fatal disasters without extremely negative consequences lead firms that behave more aggressively, whereas CEOs who witness the extreme downside of disasters behave more conservatively. These patterns manifest across various corporate policies including leverage, cash holdings, and acquisition activity. Ultimately, the link between CEOs’ disaster experience and corporate policies has real economic consequences on firm riskiness and cost of capital.

  January 12, 2017   doi: 10.1111/jofi.12432   open full text
• The Real Effects of Credit Ratings: The Sovereign Ceiling Channel.
  Heitor Almeida, Igor Cunha, Miguel A. Ferreira, Felipe Restrepo.
  The Journal of Finance. January 12, 2017
  We show that sovereign debt impairments can have a significant effect on financial markets and real economies through a credit ratings channel. Specifically, we find that firms reduce their investment and reliance on credit markets due to a rising cost of debt capital following a sovereign rating downgrade. We identify these effects by exploiting exogenous variation in corporate ratings due to rating agencies' sovereign ceiling policies, which require that firms' ratings remain at or below the sovereign rating of their country of domicile.

  January 12, 2017   doi: 10.1111/jofi.12434   open full text
• Ex‐Dividend Profitability and Institutional Trading Skill.
  Tyler R. Henry, Jennifer L. Koski.
  The Journal of Finance. January 12, 2017
  We use institutional trading data to examine whether skilled institutions exploit positive abnormal ex‐dividend returns. Results show that institutions concentrate trading around certain ex‐dates, and earn higher profits around these events. Dividend capture trades represent 6% of all institutional buy trades but contribute 15% of overall abnormal returns. Institutional dividend capture trading is persistent. Institutional ex‐day profitability is also strongly cross‐sectionally related to trade execution skill. The relation between execution skill and profits disappears around placebo non‐ex‐days. Results suggest that skilled institutions target certain opportunities rather than benefiting uniformly over time. Furthermore, only skilled institutions can profit from dividend capture.

  January 12, 2017   doi: 10.1111/jofi.12472   open full text
• Asset Pricing with Countercyclical Household Consumption Risk.
  George M. Constantinides, Anisha Ghosh.
  The Journal of Finance. January 12, 2017
  We show that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and drive asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences. A single state variable drives the conditional cross‐sectional moments of household consumption growth. The estimated model fits well the unconditional cross‐sectional moments of household consumption growth and the moments of the risk‐free rate, equity premium, price‐dividend ratio, and aggregate dividend and consumption growth. The model‐implied risk‐free rate and price‐dividend ratio are procyclical, while the market return has countercyclical mean and variance. Finally, household consumption risk explains the cross section of excess returns.

  January 12, 2017   doi: 10.1111/jofi.12471   open full text
• Local Risk, Local Factors, and Asset Prices.
  Selale Tuzel, Miao Ben Zhang.
  The Journal of Finance. January 12, 2017
  Firm location affects firm risk through local factor prices. We find more procyclical factor prices such as wages and real estate prices in areas with more cyclical economies, namely, high “local beta” areas. While procyclical wages provide a natural hedge against aggregate shocks and reduce firm risk, procyclical prices of real estate, which are part of firm assets, increase firm risk. We confirm that firms located in higher local beta areas have lower industry‐adjusted returns and conditional betas, and show that the effect is stronger among firms with low real estate holdings. A production‐based equilibrium model explains these empirical findings.

  January 12, 2017   doi: 10.1111/jofi.12465   open full text
• Buyout Activity: The Impact of Aggregate Discount Rates.
  Valentin Haddad, Erik Loualiche, Matthew Plosser.
  The Journal of Finance. January 12, 2017
  Buyout booms form in response to declines in the aggregate risk premium. We document that the equity risk premium is the primary determinant of buyout activity rather than credit‐specific conditions. We articulate a simple explanation for this phenomenon: a low risk premium increases the present value of performance gains and decreases the cost of holding an illiquid investment. A panel of U.S. buyouts confirms this view. The risk premium shapes changes in buyout characteristics over the cycle, including their riskiness, leverage, and performance. Our results underscore the importance of the risk premium in corporate finance decisions.

  January 12, 2017   doi: 10.1111/jofi.12464   open full text
• Financial Contracting and Organizational Form: Evidence from the Regulation of Trade Credit.
  Emily Breza, Andres Liberman.
  The Journal of Finance. January 12, 2017
  We present evidence that restrictions to the set of feasible financial contracts affect buyer‐supplier relationships and the organizational form of the firm. We exploit a regulation that restricted the maturity of the trade credit contracts that a large retailer could sign with some of its small suppliers. Using a within‐product difference‐in‐differences identification strategy, we find that the restriction reduces the likelihood of trade by 11%. The retailer also responds by internalizing procurement to its own subsidiaries and reducing overall purchases. Finally, we find that relational contracts can mitigate the inability to extend long trade credit terms.

  January 12, 2017   doi: 10.1111/jofi.12439   open full text
• Formative Experiences and Portfolio Choice: Evidence from the Finnish Great Depression.
  Samuli Knüpfer, Elias Rantapuska, Matti Sarvimäki.
  The Journal of Finance. January 12, 2017
  We trace the impact of formative experiences on portfolio choice. Plausibly exogenous variation in workers’ exposure to a depression allows us to identify the effects and a new estimation approach makes addressing wealth and income effects possible. We find that adversely affected workers are less likely to invest in risky assets. This result is robust to a number of control variables and it holds for individuals whose income, employment, and wealth were unaffected. The effects travel through social networks: individuals whose neighbors and family members experienced adverse circumstances also avoid risky investments.

  January 12, 2017   doi: 10.1111/jofi.12469   open full text
• Housing Collateral and Entrepreneurship.
  Martin C. Schmalz, David A. Sraer, David Thesmar.
  The Journal of Finance. January 12, 2017
  We show that collateral constraints restrict firm entry and postentry growth, using French administrative data and cross‐sectional variation in local house‐price appreciation as shocks to collateral values. We control for local demand shocks by comparing treated homeowners to controls in the same region that do not experience collateral shocks: renters and homeowners with an outstanding mortgage, who (in France) cannot take out a second mortgage. In both comparisons, an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, treated entrepreneurs use more debt, start larger firms, and remain larger in the long run.

  January 12, 2017   doi: 10.1111/jofi.12468   open full text
• Asset Pricing without Garbage.
  Tim A. Kroencke.
  The Journal of Finance. January 12, 2017
  This paper provides an explanation for why garbage implies a much lower relative risk aversion in the consumption‐based asset pricing model than National Income and Product Accounts (NIPA) consumption expenditure: Unlike garbage, NIPA consumption is filtered to mitigate measurement error. I apply a simple model of the filtering process that allows one to undo the filtering inherent in NIPA consumption. “Unfiltered NIPA consumption” well explains the equity premium and is priced in the cross‐section of stock returns. I discuss the likely properties of true consumption (i.e., without measurement error and filtering) and quantify implications for habit and long‐run risk models.

  January 12, 2017   doi: 10.1111/jofi.12438   open full text
• Who Are the Value and Growth Investors?
  Sebastien Betermier, Laurent E. Calvet, Paolo Sodini.
  The Journal of Finance. January 12, 2017
  This paper investigates value and growth investing in a large administrative panel of Swedish residents. We show that, over the life cycle, households progressively shift from growth to value as they become older and their balance sheets improve. Furthermore, investors with high human capital and high exposure to macroeconomic risk tilt their portfolios away from value. While several behavioral biases seem evident in the data, the patterns we uncover are overall remarkably consistent with the portfolio implications of risk‐based theories of the value premium.

  January 12, 2017   doi: 10.1111/jofi.12473   open full text
• Behind the Scenes: The Corporate Governance Preferences of Institutional Investors.
  JOSEPH A. McCAHERY, ZACHARIAS SAUTNER, LAURA T. STARKS.
  The Journal of Finance. November 10, 2016
  We survey institutional investors to better understand their role in the corporate governance of firms. Consistent with a number of theories, we document widespread behind‐the‐scenes intervention as well as governance‐motivated exit. These governance mechanisms are viewed as complementary devices, with intervention typically occurring prior to a potential exit. We further find that long‐term investors and investors that are less concerned about stock liquidity intervene more intensively. Finally, we find that most investors use proxy advisors and believe that the information provided by such advisors improves their own voting decisions.

  November 10, 2016   doi: 10.1111/jofi.12393   open full text
• “Lucas” in the Laboratory.
  Elena Asparouhova, Peter Bossaerts, Nilanjan Roy, William Zame.
  The Journal of Finance. November 10, 2016
  We study the Lucas asset pricing model in a controlled setting. Participants trade two long‐lived securities in a continuous open‐book system. The experimental design emulates the stationary, infinite‐horizon setting of the model and incentivizes participants to smooth consumption across periods. Consistent with the model, prices align with consumption betas and comove with aggregate dividends, particularly so when risk premia are higher. Trading significantly increases consumption smoothing compared to autarky. Nevertheless, as in field markets, prices are excessively volatile. The noise corrupts traditional generalized method of moment tests. Choices display substantial heterogeneity, with no subject representative for pricing.

  November 10, 2016   doi: 10.1111/jofi.12392   open full text
• Corporate Scandals and Household Stock Market Participation.
  Mariassunta Giannetti, Tracy Yue Wang.
  The Journal of Finance. November 10, 2016
  We show that, after the revelation of corporate fraud in a state, household stock market participation in that state decreases. Households decrease holdings in fraudulent as well as nonfraudulent firms, even if they do not hold stocks in fraudulent firms. Within a state, households with more lifetime experience of corporate fraud hold less equity. Following the exogenous increase in fraud revelation due to Arthur Andersen's demise, states with more Arthur Andersen clients experience a larger decrease in stock market participation. We provide evidence that the documented effect is likely to reflect a loss of trust in the stock market.

  November 10, 2016   doi: 10.1111/jofi.12399   open full text
• Learning about Mutual Fund Managers.
  Darwin Choi, Bige Kahraman, Abhiroop Mukherjee.
  The Journal of Finance. November 10, 2016
  We study capital allocations to managers with two mutual funds, and show that investors learn about managers from their performance records. Flows into a fund are predicted by the manager's performance in his other fund, especially when he outperforms and when signals from the other fund are more useful. In equilibrium, capital should be allocated such that there is no cross‐fund predictability. However, we find positive predictability, particularly among underperforming funds. Our results are consistent with incomplete learning: while investors move capital in the right direction, they do not withdraw enough capital when the manager underperforms in his other fund.

  November 10, 2016   doi: 10.1111/jofi.12405   open full text
• Misspecified Recovery.
  Jaroslav Borovička, Lars Peter Hansen, José A. Scheinkman.
  The Journal of Finance. November 10, 2016
  Asset prices contain information about the probability distribution of future states and the stochastic discounting of those states as used by investors. To better understand the challenge in distinguishing investors' beliefs from risk‐adjusted discounting, we use Perron–Frobenius Theory to isolate a positive martingale component of the stochastic discount factor process. This component recovers a probability measure that absorbs long‐term risk adjustments. When the martingale is not degenerate, surmising that this recovered probability captures investors' beliefs distorts inference about risk‐return tradeoffs. Stochastic discount factors in many structural models of asset prices have empirically relevant martingale components.

  November 10, 2016   doi: 10.1111/jofi.12404   open full text
• A Tale of Two Runs: Depositor Responses to Bank Solvency Risk.
  Rajkamal Iyer, Manju Puri, Nicholas Ryan.
  The Journal of Finance. November 10, 2016
  We examine heterogeneity in depositor responses to solvency risk using depositor‐level data for a bank that faced two different runs. We find that depositors with loans and bank staff are less likely to run than others during a low‐solvency‐risk shock, but are more likely to run during a high‐solvency‐risk shock. Uninsured depositors are also sensitive to bank solvency. In contrast, depositors with older accounts run less, and those with frequent past transactions run more, irrespective of the underlying risk. Our results show that the fragility of a bank depends on the composition of its deposit base.

  November 10, 2016   doi: 10.1111/jofi.12424   open full text
• Credit Rationing, Income Exaggeration, and Adverse Selection in the Mortgage Market.
  Brent W. Ambrose, James Conklin, Jiro Yoshida.
  The Journal of Finance. November 10, 2016
  We examine the role of borrower concerns about future credit availability in mitigating the effects of adverse selection and income misrepresentation in the mortgage market. We show that the majority of additional risk associated with “low‐doc” mortgages originated prior to the Great Recession was due to adverse selection on the part of borrowers who could verify income but chose not to. We provide novel evidence that these borrowers were more likely to inflate or exaggerate their income. Our analysis suggests that recent regulatory changes that have essentially eliminated the low‐doc loan product would result in credit rationing against self‐employed borrowers.

  November 10, 2016   doi: 10.1111/jofi.12426   open full text
• Ties That Bind: How Business Connections Affect Mutual Fund Activism.
  Dragana Cvijanović, Amil Dasgupta, Konstantinos E. Zachariadis.
  The Journal of Finance. November 10, 2016
  We investigate whether business ties with portfolio firms influence mutual funds' proxy voting using a comprehensive data set spanning 2003 to 2011. In contrast to prior literature, we find that business ties significantly influence promanagement voting at the level of individual pairs of fund families and firms after controlling for Institutional Shareholder Services (ISS) recommendations and holdings. The association is significant only for shareholder‐sponsored proposals and stronger for those that pass or fail by relatively narrow margins. Our findings are consistent with a demand‐driven model of biased voting in which company managers use existing business ties with funds to influence how they vote.

  November 10, 2016   doi: 10.1111/jofi.12425   open full text
• American Finance Association.
  Peter DeMarzo.
  The Journal of Finance. November 10, 2016
  There is no abstract available for this paper.

  November 10, 2016   doi: 10.1111/jofi.12477   open full text
• Infrequent Rebalancing, Return Autocorrelation, and Seasonality.
  Vincent Bogousslavsky.
  The Journal of Finance. November 10, 2016
  A model of infrequent rebalancing can explain specific predictability patterns in the time series and cross‐section of stock returns. First, infrequent rebalancing produces return autocorrelations that are consistent with empirical evidence from intraday returns and new evidence from daily returns. Autocorrelations can switch sign and become positive at the rebalancing horizon. Second, the cross‐sectional variance in expected returns is larger when more traders rebalance. This effect generates seasonality in the cross‐section of stock returns, which can help explain available empirical evidence.

  November 10, 2016   doi: 10.1111/jofi.12436   open full text
• Valuation Risk and Asset Pricing.
  Rui Albuquerque, Martin Eichenbaum, Victor Xi Luo, Sergio Rebelo.
  The Journal of Finance. November 10, 2016
  Standard representative‐agent models fail to account for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing, which underlies virtually all modern asset pricing puzzles, arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role. These shocks give rise to valuation risk that allows the model to account for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals.

  November 10, 2016   doi: 10.1111/jofi.12437   open full text
• Compensating Financial Experts.
  Vincent Glode, Richard Lowery.
  The Journal of Finance. November 10, 2016
  We propose a labor market model in which financial firms compete for a scarce supply of workers who can be employed as either bankers or traders. While hiring bankers helps create a surplus that can be split between a firm and its trading counterparties, hiring traders helps the firm appropriate a greater share of that surplus away from its counterparties. Firms bid defensively for workers bound to become traders, who then earn more than bankers. As counterparties employ more traders, the benefit of employing bankers decreases. The model sheds light on the historical evolution of compensation in finance.

  November 10, 2016   doi: 10.1111/jofi.12372   open full text
• Do Creditor Rights Increase Employment Risk? Evidence from Loan Covenants.
  Antonio Falato, Nellie Liang.
  The Journal of Finance. November 10, 2016
  Using a regression discontinuity design, we provide evidence that there are sharp and substantial employment cuts following loan covenant violations, when creditors gain rights to accelerate, restructure, or terminate a loan. The cuts are larger at firms with higher financing frictions and with weaker employee bargaining power, and during industry and macroeconomic downturns, when employees have fewer job opportunities. Union elections that create new labor bargaining units lead to higher loan spreads, consistent with creditors requiring compensation when employees gain bargaining power. Overall, binding financial contracts have a large impact on employees and are an amplification mechanism of economic downturns.

  November 10, 2016   doi: 10.1111/jofi.12435   open full text
• Boom and Gloom.
  Paul Povel, Giorgo Sertsios, Renáta Kosová, Praveen Kumar.
  The Journal of Finance. September 14, 2016
  We study the performance of investments made at different points of an investment cycle. We use a large data set covering hotels in the United States, with rich details on their location, characteristics, and performance. We find that hotels built during hotel construction booms underperform their peers. For hotels built during local hotel construction booms, this underperformance persists for several decades. We examine possible explanations for this long‐lasting underperformance. The evidence is consistent with information‐based herding explanations.

  September 14, 2016   doi: 10.1111/jofi.12391   open full text
• Firing Costs and Capital Structure Decisions.
  Matthew Serfling.
  The Journal of Finance. September 14, 2016
  I exploit the adoption of state‐level labor protection laws as an exogenous increase in employee firing costs to examine how the costs associated with discharging workers affect capital structure decisions. I find that firms reduce debt ratios following the adoption of these laws, with this result stronger for firms that experience larger increases in firing costs. I also document that, following the adoption of these laws, a firm's degree of operating leverage rises, earnings variability increases, and employment becomes more rigid. Overall, these results are consistent with higher firing costs crowding out financial leverage via increasing financial distress costs.

  September 14, 2016   doi: 10.1111/jofi.12403   open full text
• The Price of Political Uncertainty: Theory and Evidence from the Option Market.
  Bryan Kelly, ľuboš Pástor, Pietro Veronesi.
  The Journal of Finance. September 14, 2016
  We empirically analyze the pricing of political uncertainty, guided by a theoretical model of government policy choice. To isolate political uncertainty, we exploit its variation around national elections and global summits. We find that political uncertainty is priced in the equity option market as predicted by theory. Options whose lives span political events tend to be more expensive. Such options provide valuable protection against the price, variance, and tail risks associated with political events. This protection is more valuable in a weaker economy and amid higher political uncertainty. The effects of political uncertainty spill over across countries.

  September 14, 2016   doi: 10.1111/jofi.12406   open full text
• Advertising Expensive Mortgages.
  Umit G. Gurun, Gregor Matvos, Amit Seru.
  The Journal of Finance. September 14, 2016
  Using information on advertising and mortgages originated by subprime lenders, we study whether advertising helped consumers find cheaper mortgages. Lenders that advertise more within a region sell more expensive mortgages, measured as the excess rate of a mortgage after accounting for borrower, contract, and regional characteristics. These effects are stronger for mortgages sold to less sophisticated consumers. We exploit regional variation in mortgage advertising induced by the entry of Craigslist and other tests to demonstrate that these findings are not spurious. Analyzing advertising content reveals that initial/introductory rates are frequently advertised in a salient fashion, where reset rates are not.

  September 14, 2016   doi: 10.1111/jofi.12423   open full text
• Who Borrows from the Lender of Last Resort?
  Itamar Drechsler, Thomas Drechsel, David Marques‐Ibanez, Philipp Schnabl.
  The Journal of Finance. September 14, 2016
  We analyze lender of last resort (LOLR) lending during the European sovereign debt crisis. Using a novel data set on all central bank lending and collateral, we show that weakly capitalized banks took out more LOLR loans and used riskier collateral than strongly capitalized banks. We also find that weakly capitalized banks used LOLR loans to buy risky assets such as distressed sovereign debt. This resulted in a reallocation of risky assets from strongly to weakly capitalized banks. Our findings cannot be explained by classical LOLR theory. Rather, they point to risk taking by banks, both independently and with the encouragement of governments, and highlight the benefit of unifying LOLR lending and bank supervision.

  September 14, 2016   doi: 10.1111/jofi.12421   open full text
• Capital Investment, Innovative Capacity, and Stock Returns.
  Praveen Kumar, Dongmei Li.
  The Journal of Finance. September 14, 2016
  We study the dynamic implications of capital investment in innovative capacity (IC) on future stock returns, investment, and profitability by modeling the unique effects of IC investment on uncertain option generation/exercise and postexercise revenue. The model highlights the diverse effects of IC investment on expected returns in different postinvestment regimes and yields the novel prediction that, under the neoclassical assumption of nonincreasing revenue returns, IC investment is positively related to subsequent cumulative stock returns with a lag. The model also predicts a positive effect of IC investment on future investment and profitability. We find strong empirical support for these predictions.

  September 14, 2016   doi: 10.1111/jofi.12419   open full text
• Can Brokers Have It All? On the Relation between Make‐Take Fees and Limit Order Execution Quality.
  Robert Battalio, Shane A. Corwin, Robert Jennings.
  The Journal of Finance. September 14, 2016
  We identify retail brokers that seemingly route orders to maximize order flow payments, by selling market orders and sending limit orders to venues paying large liquidity rebates. Angel, Harris, and Spatt argue that such routing may not always be in customers’ best interests. For both proprietary limit order data and a broad sample of trades from TAQ, we document a negative relation between several measures of limit order execution quality and rebate/fee level. This finding suggests that order routing designed to maximize liquidity rebates does not maximize limit order execution quality and thus brokers cannot have it all.

  September 14, 2016   doi: 10.1111/jofi.12422   open full text
• Why Invest in Emerging Markets? The Role of Conditional Return Asymmetry.
  Eric Ghysels, Alberto Plazzi, Rossen Valkanov.
  The Journal of Finance. September 14, 2016
  We propose a quantile‐based measure of conditional skewness, particularly suitable for handling recalcitrant emerging market (EM) returns. The skewness of international stock market returns varies significantly across countries over time, and persists at long horizons. In EMs, skewness is mostly positive and idiosyncratic, and significantly relates to a country's financial and trade openness and balance of payments. In an international portfolio setting, return asymmetry leads to sizeable certainty‐equivalent gains and increases the weight on emerging countries to about 30%. Investing in EMs seems to be about expectations of a higher upside than downside, consistent with recent theories.

  September 14, 2016   doi: 10.1111/jofi.12420   open full text
• Financing Constraints and Workplace Safety.
  Jonathan B. Cohn, Malcolm I. Wardlaw.
  The Journal of Finance. September 14, 2016
  We present evidence that financing frictions adversely impact investment in workplace safety, with implications for worker welfare and firm value. Using several identification strategies, we find that injury rates increase with leverage and negative cash flow shocks, and decrease with positive cash flow shocks. We show that firm value decreases substantially with injury rates. Our findings suggest that investment in worker safety is an economically important margin on which firms respond to financing constraints.

  September 14, 2016   doi: 10.1111/jofi.12430   open full text
• Speculative Betas.
  Harrison Hong, David A. Sraer.
  The Journal of Finance. September 14, 2016
  The risk and return trade‐off, the cornerstone of modern asset pricing theory, is often of the wrong sign. Our explanation is that high‐beta assets are prone to speculative overpricing. When investors disagree about the stock market's prospects, high‐beta assets are more sensitive to this aggregate disagreement, experience greater divergence of opinion about their payoffs, and are overpriced due to short‐sales constraints. When aggregate disagreement is low, the Security Market Line is upward‐sloping due to risk‐sharing. When it is high, expected returns can actually decrease with beta. We confirm our theory using a measure of disagreement about stock market earnings.

  September 14, 2016   doi: 10.1111/jofi.12431   open full text
• Miscellanea.
  
  The Journal of Finance. September 14, 2016
  There is no abstract available for this paper.

  September 14, 2016   doi: 10.1111/jofi.12440   open full text
• Picking Winners? Investment Consultants’ Recommendations of Fund Managers.
  Tim Jenkinson, Howard Jones, Jose Vicente Martinez.
  The Journal of Finance. September 14, 2016
  Investment consultants advise institutional investors on their choice of fund manager. Focusing on U.S. actively managed equity funds, we analyze the factors that drive consultants’ recommendations, what impact these recommendations have on flows, and how well the recommended funds perform. We find that investment consultants’ recommendations of funds are driven largely by soft factors, rather than the funds’ past performance, and that their recommendations have a significant effect on fund flows. However, we find no evidence that these recommendations add value, suggesting that the search for winners, encouraged and guided by investment consultants, is fruitless.

  September 14, 2016   doi: 10.1111/jofi.12289   open full text
• Trade Credit and Industry Dynamics: Evidence from Trucking Firms.
  Jean‐Noël Barrot.
  The Journal of Finance. September 14, 2016
  Long payment terms are a strong impediment to the entry and survival of liquidity‐constrained firms. To test this idea and its implications, I consider the effect of a reform restricting the trade credit supply of French trucking firms. In a difference‐in‐differences setting, I find that trucking firms' corporate default probability decreases by 25% following the restriction. The effect is persistent, concentrated among liquidity‐constrained firms, and not offset by a decrease in profits. The restriction also triggers an increase in the entry of small trucking firms.

  September 14, 2016   doi: 10.1111/jofi.12371   open full text
• Stewart C. Myers.
  
  The Journal of Finance. September 14, 2016
  There is no abstract available for this paper.

  September 14, 2016   doi: 10.1111/jofi.12441   open full text
• The Impact of Venture Capital Monitoring.
  Shai Bernstein, Xavier Giroud, Richard R. Townsend.
  The Journal of Finance. July 13, 2016
  We show that venture capitalists' (VCs) on‐site involvement with their portfolio companies leads to an increase in both innovation and the likelihood of a successful exit. We rule out selection effects by exploiting an exogenous source of variation in VC involvement: the introduction of new airline routes that reduce VCs' travel times to their existing portfolio companies. We confirm the importance of this channel by conducting a large‐scale survey of VCs, of whom almost 90% indicate that direct flights increase their interaction with their portfolio companies and management, and help them better understand companies' activities.

  July 13, 2016   doi: 10.1111/jofi.12370   open full text
• A Model of Financialization of Commodities.
  Suleyman Basak, Anna Pavlova.
  The Journal of Finance. July 13, 2016
  We analyze how institutional investors entering commodity futures markets, referred to as the financialization of commodities, affect commodity prices. Institutional investors care about their performance relative to a commodity index. We find that all commodity futures prices, volatilities, and correlations go up with financialization, but more so for index futures than for nonindex futures. The equity‐commodity correlations also increase. We demonstrate how financial markets transmit shocks not only to futures prices but also to commodity spot prices and inventories. Spot prices go up with financialization, and shocks to any index commodity spill over to all storable commodity prices.

  July 13, 2016   doi: 10.1111/jofi.12408   open full text
• Risk‐Sharing or Risk‐Taking? Counterparty Risk, Incentives, and Margins.
  Bruno Biais, Florian Heider, Marie Hoerova.
  The Journal of Finance. July 13, 2016
  Derivatives activity, motivated by risk‐sharing, can breed risk‐taking. Bad news about the risk of an asset underlying a derivative increases protection sellers' expected liability and undermines their risk‐prevention incentives. This limits risk‐sharing, creates endogenous counterparty risk, and can lead to contagion from news about the hedged risk to the balance sheet of protection sellers. Margin calls after bad news can improve protection sellers' incentives and in turn enhance risk‐sharing. Central clearing can provide insurance against counterparty risk but must be designed to preserve risk‐prevention incentives.

  July 13, 2016   doi: 10.1111/jofi.12396   open full text
• Return Seasonalities.
  Matti Keloharju, Juhani T. Linnainmaa, Peter Nyberg.
  The Journal of Finance. July 13, 2016
  A strategy that selects stocks based on their historical same‐calendar‐month returns earns an average return of 13% per year. We document similar return seasonalities in anomalies, commodities, and international stock market indices, as well as at the daily frequency. The seasonalities overwhelm unconditional differences in expected returns. The correlations between different seasonality strategies are modest, suggesting that they emanate from different systematic factors. Our results suggest that seasonalities are not a distinct class of anomalies that requires an explanation of its own, but rather that they are intertwined with other return anomalies through shared systematic factors.

  July 13, 2016   doi: 10.1111/jofi.12398   open full text
• Good‐Specific Habit Formation and the Cross‐Section of Expected Returns.
  Jules H. Van Binsbergen.
  The Journal of Finance. July 13, 2016
  I study asset prices in a general equilibrium framework in which agents form habits over individual varieties of goods rather than over an aggregate consumption bundle. Goods are produced by monopolistically competitive firms whose elasticities of demand depend on consumers' habit formation. Firms that produce goods with a high habit level relative to consumption have low demand elasticities, set high prices for their product, have low expected returns on their stock, and have low asset pricing betas and stock return volatilities. I find supportive evidence for these predictions in the data.

  July 13, 2016   doi: 10.1111/jofi.12397   open full text
• On Enhancing Shareholder Control: A (Dodd‐) Frank Assessment of Proxy Access.
  Jonathan B. Cohn, Stuart L. Gillan, Jay C. Hartzell.
  The Journal of Finance. July 13, 2016
  We use events related to a proxy access rule passed by the Securities and Exchange Commission in 2010 as natural experiments to study the valuation effects of changes in shareholder control. We find that valuations increase (decrease) following increases (decreases) in perceived control, especially for firms that are poorly performing, have shareholders likely to exercise control, and where acquiring a stake is relatively inexpensive. These results suggest that an increase in shareholder control from its current level would generally benefit shareholders. However, we find that the benefits of increased control are muted for firms with shareholders whose interests may deviate from value maximization.

  July 13, 2016   doi: 10.1111/jofi.12402   open full text
• It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) Plans.
  Veronika K. Pool, Clemens Sialm, Irina Stefanescu.
  The Journal of Finance. July 13, 2016
  This paper investigates whether mutual fund families acting as service providers in 401(k) plans display favoritism toward their own affiliated funds. Using a hand‐collected data set on the menu of investment options offered to plan participants, we show that fund deletions and additions are less sensitive to prior performance for affiliated than unaffiliated funds. We find no evidence that plan participants undo this affiliation bias through their investment choices. Finally, we find that the subsequent performance of poorly performing affiliated funds indicates that this favoritism is not information driven.

  July 13, 2016   doi: 10.1111/jofi.12411   open full text
• The Optimal Size of Hedge Funds: Conflict between Investors and Fund Managers.
  Chengdong Yin.
  The Journal of Finance. July 13, 2016
  This study examines whether the standard compensation contract in the hedge fund industry aligns managers’ incentives with investors’ interests. I show empirically that managers’ compensation increases when fund assets grow, even when diseconomies of scale in fund performance exist. Thus, managers’ compensation is maximized at a much larger fund size than is optimal for fund performance. However, to avoid capital outflows, managers are also motivated to restrict fund growth to maintain style‐average performance. Similarly, fund management firms have incentives to collect more capital for all funds under management, including their flagship funds, even at the expense of fund performance.

  July 13, 2016   doi: 10.1111/jofi.12413   open full text
• Exodus from Sovereign Risk: Global Asset and Information Networks in the Pricing of Corporate Credit Risk.
  Jongsub Lee, Andy Naranjo, Stace Sirmans.
  The Journal of Finance. July 13, 2016
  Using five‐year credit default swap (CDS) spreads on 2,364 companies in 54 countries from 2004 to 2011, we find that firms exposed to stronger property rights through their foreign asset positions (institutional channel) and firms cross‐listed on exchanges with stricter disclosure requirements (informational channel) reduce their CDS spreads by 40 bps for a one‐standard‐deviation increase in their exposure to the two channels. These channels capture effects beyond those associated with firm‐ and country‐level fundamentals. Overall, we find that firm‐level global asset and information connections are important mechanisms to delink firms from their sovereign and country risks.

  July 13, 2016   doi: 10.1111/jofi.12412   open full text
• Do Private Firms Invest Differently than Public Firms? Taking Cues from the Natural Gas Industry.
  Erik P. Gilje, Jerome P. Taillard.
  The Journal of Finance. July 13, 2016
  We study how listing status affects investment behavior. Theory offers competing hypotheses on how listing‐related frictions affect investment decisions. We use detailed data on 74,670 individual projects in the U.S. natural gas industry to show that private firms respond less than public firms to changes in investment opportunities. Private firms adjust drilling activity for low capital‐intensity investments. However, they do not increase drilling in response to new capital‐intensive growth opportunities. Instead, they sell these projects to public firms. Our evidence suggests that differences in access to external capital are important in explaining the investment behavior of public and private firms.

  July 13, 2016   doi: 10.1111/jofi.12417   open full text
• Presidential Address: Debt and Money: Financial Constraints and Sovereign Finance.
  Patrick Bolton.
  The Journal of Finance. July 13, 2016
  Economic analyses of corporate finance, money, and sovereign debt are largely considered separately. I introduce a novel corporate finance framing of sovereign finance based on the analogy between fiat liabilities for sovereigns and equity for corporations. The analysis focuses on financial constraints at the country level, making explicit the trade‐offs involved in relying on domestic versus foreign‐currency debt to finance investments or government expenditures. This framing provides new insights into issues ranging from the costs and benefits of inflation, optimal foreign exchange reserves, and sovereign debt restructuring.

  July 13, 2016   doi: 10.1111/jofi.12418   open full text
• Risk‐Adjusting the Returns to Venture Capital.
  Arthur Korteweg, Stefan Nagel.
  The Journal of Finance. May 11, 2016
  We adapt stochastic discount factor (SDF) valuation methods for venture capital (VC) performance evaluation. Our approach generalizes the popular Public Market Equivalent (PME) method and allows statistical inference in the presence of cross‐sectionally dependent, skewed VC payoffs. We relax SDF restrictions implicit in the PME so that the SDF can accurately reflect risk‐free rates and returns of public equity markets during the sample period. This generalized PME yields substantially different abnormal performance estimates for VC funds and start‐up investments, especially in times of strongly rising public equity markets and for investments with betas far from one.

  May 11, 2016   doi: 10.1111/jofi.12390   open full text
• Information in the Term Structure of Yield Curve Volatility.
  Anna Cieslak, Pavol Povala.
  The Journal of Finance. May 11, 2016
  Using a novel no‐arbitrage model and extensive second‐moment data, we decompose conditional volatility of U.S. Treasury yields into volatilities of short‐rate expectations and term premia. Short‐rate expectations become more volatile than premia before recessions and during asset market distress. Correlation between shocks to premia and shocks to short‐rate expectations is close to zero on average and varies with the monetary policy stance. While Treasuries are nearly unexposed to variance shocks, investors pay a premium for hedging variance risk with derivatives. We illustrate the dynamics of the yield volatility components during and after the financial crisis.

  May 11, 2016   doi: 10.1111/jofi.12388   open full text
• The Total Cost of Corporate Borrowing in the Loan Market: Don't Ignore the Fees.
  Tobias Berg, Anthony Saunders, Sascha Steffen.
  The Journal of Finance. May 11, 2016
  More than 80% of U.S. syndicated loans contain at least one fee type and contracts typically specify a menu of spreads and fee types. We test the predictions of existing theories on the main purposes of fees and provide supporting evidence that: (1) fees are used to price options embedded in loan contracts such as the drawdown option for credit lines and the cancellation option in term loans, and (2) fees are used to screen borrowers based on the likelihood of exercising these options. We also propose a new total‐cost‐of‐borrowing measure that includes various fees charged by lenders.

  May 11, 2016   doi: 10.1111/jofi.12281   open full text
• From Wall Street to Main Street: The Impact of the Financial Crisis on Consumer Credit Supply.
  Rodney Ramcharan, Stéphane Verani, Skander J. Van Den Heuvel.
  The Journal of Finance. May 11, 2016
  How did the collapse of the asset‐backed securities (ABS) market during the 2007 to 2009 financial crisis affect the supply of credit to the broader economy? Using new data on the U.S. credit union industry, we find that ABS‐related losses are associated with a large contraction in the supply of credit to consumers, especially among those credit unions that began the crisis with weaker capitalization. We also find that this credit supply shock restricted the availability of mortgage and automobile credit. These results show how movements in the prices of financial assets can affect the real economy.

  May 11, 2016   doi: 10.1111/jofi.12209   open full text
• Collateralization, Bank Loan Rates, and Monitoring.
  Geraldo Cerqueiro, Steven Ongena, Kasper Roszbach.
  The Journal of Finance. May 11, 2016
  We show that collateral plays an important role in the design of debt contracts, the provision of credit, and the incentives of lenders to monitor borrowers. Using a unique data set from a large bank containing timely assessments of collateral values, we find that the bank responded to a legal reform that exogenously reduced collateral values by increasing interest rates, tightening credit limits, and reducing the intensity of its monitoring of borrowers and collateral, spurring borrower delinquency on outstanding claims. We thus explain why banks are senior lenders and quantify the value of claimant priority.

  May 11, 2016   doi: 10.1111/jofi.12214   open full text
• Short Selling and Earnings Management: A Controlled Experiment.
  Vivian W. Fang, Allen H. Huang, Jonathan M. Karpoff.
  The Journal of Finance. May 11, 2016
  During 2005 to 2007, the SEC ordered a pilot program in which one‐third of the Russell 3000 index were arbitrarily chosen as pilot stocks and exempted from short‐sale price tests. Pilot firms’ discretionary accruals and likelihood of marginally beating earnings targets decrease during this period, and revert to pre‐experiment levels when the program ends. After the program starts, pilot firms are more likely to be caught for fraud initiated before the program, and their stock returns better incorporate earnings information. These results indicate that short selling, or its prospect, curbs earnings management, helps detect fraud, and improves price efficiency.

  May 11, 2016   doi: 10.1111/jofi.12369   open full text
• Worrying about the Stock Market: Evidence from Hospital Admissions.
  Joseph Engelberg, Christopher A. Parsons.
  The Journal of Finance. May 11, 2016
  Using individual patient records for every hospital in California from 1983 to 2011, we find a strong inverse link between daily stock returns and hospital admissions, particularly for psychological conditions such as anxiety, panic disorder, and major depression. The effect is nearly instantaneous (within the same day) for psychological conditions, suggesting that anticipation over future consumption directly influences instantaneous utility.

  May 11, 2016   doi: 10.1111/jofi.12386   open full text
• The Boats That Did Not Sail: Asset Price Volatility in a Natural Experiment.
  Peter Koudijs.
  The Journal of Finance. May 11, 2016
  What explains short‐term fluctuations of stock prices? This paper exploits a natural experiment from the 18 century in which information flows were regularly interrupted for exogenous reasons. English shares were traded on the Amsterdam exchange and news came in on sailboats that were often delayed because of adverse weather conditions. The paper documents that prices responded strongly to boat arrivals, but there was considerable volatility in the absence of news. The evidence suggests that this was largely the result of the revelation of (long‐lived) private information and the (transitory) impact of uninformed liquidity trades on intermediaries' risk premia.

  May 11, 2016   doi: 10.1111/jofi.12312   open full text
• Exporting Liquidity: Branch Banking and Financial Integration.
  Erik P. Gilje, Elena Loutskina, Philip E. Strahan.
  The Journal of Finance. May 11, 2016
  Using exogenous liquidity windfalls from oil and natural gas shale discoveries, we demonstrate that bank branch networks help integrate U.S. lending markets. Banks exposed to shale booms enjoy liquidity inflows, which increase their capacity to originate and hold new loans. Exposed banks increase mortgage lending in nonboom counties, but only where they have branches and only for hard‐to‐securitize mortgages. Our findings suggest that contracting frictions limit the ability of arm's length finance to integrate credit markets fully. Branch networks continue to play an important role in financial integration, despite the development of securitization markets.

  May 11, 2016   doi: 10.1111/jofi.12387   open full text
• Information Acquisition in Rumor‐Based Bank Runs.
  Zhiguo He, Asaf Manela.
  The Journal of Finance. May 11, 2016
  We study information acquisition and dynamic withdrawal decisions when a spreading rumor exposes a solvent bank to a run. Uncertainty about the bank's liquidity and potential failure motivates depositors who hear the rumor to acquire additional noisy signals. Depositors with less informative signals may wait before gradually running on the bank, leading to an endogenous aggregate withdrawal speed and bank survival time. Private information acquisition about liquidity can subject solvent‐but‐illiquid banks to runs, and shorten the survival time of failing banks. Public provision of solvency information can mitigate runs by indirectly crowding‐out individual depositors' effort to acquire liquidity information.

  May 11, 2016   doi: 10.1111/jofi.12202   open full text
• Asymmetric Information about Collateral Values.
  Johannes Stroebel.
  The Journal of Finance. May 11, 2016
  I empirically analyze credit market outcomes when competing lenders are differentially informed about the expected return from making a loan. I study the residential mortgage market, where property developers often cooperate with vertically integrated mortgage lenders to offer financing to buyers of new homes. I show that these integrated lenders have superior information about the construction quality of individual homes and exploit this information to lend against higher quality collateral, decreasing foreclosures by up to 40%. To compensate for this adverse selection on collateral quality, nonintegrated lenders charge higher interest rates when competing against a better‐informed integrated lender.

  May 11, 2016   doi: 10.1111/jofi.12288   open full text
• Local Currency Sovereign Risk.
  Wenxin Du, Jesse Schreger.
  The Journal of Finance. May 11, 2016
  We introduce a new measure of emerging market sovereign credit risk: the local currency credit spread, defined as the spread of local currency bonds over the synthetic local currency risk‐free rate constructed using cross‐currency swaps. We find that local currency credit spreads are positive and sizable. Compared with credit spreads on foreign‐currency‐denominated debt, local currency credit spreads have lower means, lower cross‐country correlations, and lower sensitivity to global risk factors. We discuss several major sources of credit spread differentials, including positively correlated credit and currency risk, selective default, capital controls, and various financial market frictions.

  May 11, 2016   doi: 10.1111/jofi.12389   open full text
• Oliver Hart.
  
  The Journal of Finance. May 11, 2016
  There is no abstract available for this paper.

  May 11, 2016   doi: 10.1111/jofi.12410   open full text
• The Real Impact of Improved Access to Finance: Evidence from Mexico.
  Miriam Bruhn, Inessa Love.
  The Journal of Finance. May 08, 2014
  This paper provides new evidence on the impact of access to finance on poverty. It highlights an important channel through which access affects poverty—the labor market. The paper exploits the opening of Banco Azteca in Mexico, a unique “natural experiment” in which over 800 bank branches opened almost simultaneously in preexisting Elektra stores. Importantly, the bank has focused on previously underserved low‐income clients. Our key finding is a sizeable effect of access to finance on labor market activity and income levels, especially among low‐income individuals and those located in areas with lower preexisting bank penetration.

  May 08, 2014   doi: 10.1111/jofi.12091   open full text
• Labor Mobility: Implications for Asset Pricing.
  Andrés Donangelo.
  The Journal of Finance. May 08, 2014
  Labor mobility is the flexibility of workers to walk away from an industry in response to better opportunities. I develop a model in which labor flows make bad times worse for shareholders who are left with capital that is less productive. The model shows that firms face greater operating leverage by providing flexibility to mobile workers. I construct an empirical measure of labor mobility consistent with the model and document an economically significant cross‐sectional relation between mobility, operating leverage, and stock returns. I find that firms in mobile industries earn returns over 5% higher than those in less mobile industries.

  May 08, 2014   doi: 10.1111/jofi.12141   open full text
• Broad‐Based Employee Stock Ownership: Motives and Outcomes.
  E. Han Kim, Paige Ouimet.
  The Journal of Finance. May 08, 2014
  Firms initiating broad‐based employee share ownership plans often claim employee stock ownership plans (ESOPs) increase productivity by improving employee incentives. Do they? Small ESOPs comprising less than 5% of shares, granted by firms with moderate employee size, increase the economic pie, benefiting both employees and shareholders. The effects are weaker when there are too many employees to mitigate free‐riding. Although some large ESOPs increase productivity and employee compensation, the average impacts are small because they are often implemented for nonincentive purposes such as conserving cash by substituting wages with employee shares or forming a worker‐management alliance to thwart takeover bids.

  May 08, 2014   doi: 10.1111/jofi.12150   open full text
• The Market Value of Corporate Votes: Theory and Evidence from Option Prices.
  Avner Kalay, Oǧuzhan Karakaş, Shagun Pant.
  The Journal of Finance. May 08, 2014
  This paper proposes a new method using option prices to estimate the market value of the shareholder voting rights associated with a stock. The method consists of synthesizing a nonvoting share using put‐call parity, and comparing its price to that of the underlying stock. Empirically, we find this measure of the value of voting rights to be positive and increasing in the time to expiration of synthetic stocks. The measure also increases around special shareholder meetings, periods of hedge fund activism, and M&A events. The method is likely useful in studies of corporate control and also has asset pricing implications.

  May 08, 2014   doi: 10.1111/jofi.12132   open full text
• Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks.
  Scott Joslin, Marcel Priebsch, Kenneth J. Singleton.
  The Journal of Finance. May 08, 2014
  This paper quantifies how variation in economic activity and inflation in the United States influences the market prices of level, slope, and curvature risks in Treasury markets. We develop a novel arbitrage‐free dynamic term structure model in which bond investment decisions are influenced by output and inflation risks that are unspanned by (imperfectly correlated with) information about the shape of the yield curve. Our model reveals that, between 1985 and 2007, these risks accounted for a large portion of the variation in forward terms premiums, and there was pronounced cyclical variation in the market prices of level and slope risks.

  May 08, 2014   doi: 10.1111/jofi.12131   open full text
• Thirty Years of Shareholder Rights and Firm Value.
  Martijn Cremers, Allen Ferrell.
  The Journal of Finance. May 08, 2014
  This paper introduces a new hand‐collected data set that tracks restrictions on shareholder rights at approximately 1,000 firms from 1978 to 1989. In conjunction with the 1990 to 2006 IRRC data, we track shareholder rights over 30 years. Most governance changes occurred during the 1980s. We find a robustly negative association between restrictions on shareholder rights (using G‐Index as a proxy) and Tobin's Q. The negative association only appears after judicial approval of antitakeover defenses in the 1985 landmark Delaware Supreme Court decision of Moran v. Household. This decision was an unanticipated exogenous shock that increased the importance of shareholder rights.

  May 08, 2014   doi: 10.1111/jofi.12138   open full text
• Legal Investor Protection and Takeovers.
  Mike Burkart, Denis Gromb, Holger M. Mueller, Fausto Panunzi.
  The Journal of Finance. May 08, 2014
  This paper examines the role of legal investor protection for the efficiency of the market for corporate control when bidders are financially constrained. In the model, stronger legal investor protection increases bidders' outside funding capacity. However, absent effective bidding competition, this does not improve efficiency, as the bid price, and thus bidders' need for funds, increases one‐for‐one with the pledgeable income. In contrast, under effective competition for the target, the increased outside funding capacity improves efficiency by making it less likely that more efficient but less wealthy bidders are outbid by less efficient but wealthier rivals.

  May 08, 2014   doi: 10.1111/jofi.12142   open full text
• Connected Stocks.
  Miguel Antón, Christopher Polk.
  The Journal of Finance. May 08, 2014
  We connect stocks through their common active mutual fund owners. We show that the degree of shared ownership forecasts cross‐sectional variation in return correlation, controlling for exposure to systematic return factors, style and sector similarity, and many other pair characteristics. We argue that shared ownership causes this excess comovement based on evidence from a natural experiment—the 2003 mutual fund trading scandal. These results motivate a novel cross‐stock‐reversal trading strategy exploiting information contained in ownership connections. We show that long‐short hedge fund index returns covary negatively with this strategy, suggesting these funds may exacerbate this excess comovement.

  May 08, 2014   doi: 10.1111/jofi.12149   open full text
• The Cross‐Section of Managerial Ability, Incentives, and Risk Preferences.
  Ralph S.J. Koijen.
  The Journal of Finance. May 08, 2014
  I estimate a dynamic investment model for mutual managers to study the cross‐sectional distribution of ability, incentives, and risk preferences. The manager's compensation depends on the size of the fund, which fluctuates due to fund returns and due to fund flows that respond to the fund's relative performance. The model provides an economic interpretation of time‐varying coefficients in performance regressions in terms of the structural parameters. I document that the estimates of fund alphas are precise and virtually unbiased. I find substantial heterogeneity in ability, risk preferences, and pay‐for‐performance sensitivities that relates to observable fund characteristics.

  May 08, 2014   doi: 10.1111/jofi.12140   open full text
• CEO Ownership, Stock Market Performance, and Managerial Discretion.
  Ulf Von Lilienfeld‐Toal, Stefan Ruenzi.
  The Journal of Finance. May 08, 2014
  We examine the relationship between CEO ownership and stock market performance. A strategy based on public information about managerial ownership delivers annual abnormal returns of 4% to 10%. The effect is strongest among firms with weak external governance, weak product market competition, and large managerial discretion, suggesting that CEO ownership can reverse the negative impact of weak governance. Furthermore, owner‐CEOs are value increasing: they reduce empire building and run their firms more efficiently. Overall, our findings indicate that the market does not correctly price the incentive effects of managerial ownership, suggesting interesting feedback effects between corporate finance and asset pricing.

  May 08, 2014   doi: 10.1111/jofi.12139   open full text
• Refinancing Risk and Cash Holdings.
  Jarrad Harford, Sandy Klasa, William F. Maxwell.
  The Journal of Finance. May 08, 2014
  We find that firms mitigate refinancing risk by increasing their cash holdings and saving cash from cash flows. The maturity of firms’ long‐term debt has shortened markedly, and this shortening explains a large fraction of the increase in cash holdings over time. Consistent with the inference that cash reserves are particularly valuable for firms with refinancing risk, we document that the value of these reserves is higher for such firms and that they mitigate underinvestment problems. Our findings imply that refinancing risk is a key determinant of cash holdings and highlight the interdependence of a firm's financial policy decisions.

  May 08, 2014   doi: 10.1111/jofi.12133   open full text
• The Business Cycle, Investor Sentiment, and Costly External Finance.
  R. David Mclean, Mengxin Zhao.
  The Journal of Finance. May 08, 2014
  The recent financial crisis shows that financial markets can impact the real economy. We investigate whether access to finance typically time‐varies and, if so, what are the real effects. Consistent with time‐varying external finance costs, both investment and employment are less sensitive to Tobin's q and more sensitive to cash flow during recessions and low investor sentiment periods. Share issuance plays a bigger role than debt issuance in causing these effects. Alternative tests that do not rely on q and cash flow sensitivities suggest that recessions and low sentiment increase external finance costs, thereby limiting investment and employment.

  May 08, 2014   doi: 10.1111/jofi.12047   open full text
• Evidence on the Benefits of Alternative Mortgage Products.
  João F. Cocco.
  The Journal of Finance. July 16, 2013
  Alternative mortgage products have been identified by many as culprits in the financial crisis. However, because of their lower initial mortgage payments relative to loan amount, they may be a valuable tool for households that expect higher and more certain future labor income, and that wish to smooth consumption over the life‐cycle. Using U.K. household‐level panel data, this paper provides evidence in support of this hypothesis and highlights other important benefits of alternative mortgages, including portfolio diversification, tax benefits, and a reduction in the transaction costs incurred in housing transactions.

  July 16, 2013   doi: 10.1111/jofi.12049   open full text
• International Stock Return Predictability: What Is the Role of the United States?
  David E. Rapach, Jack K. Strauss, Guofu Zhou.
  The Journal of Finance. July 16, 2013
  We investigate lead‐lag relationships among monthly country stock returns and identify a leading role for the United States: lagged U.S. returns significantly predict returns in numerous non‐U.S. industrialized countries, while lagged non‐U.S. returns display limited predictive ability with respect to U.S. returns. We estimate a news‐diffusion model, and the results indicate that return shocks arising in the United States are only fully reflected in equity prices outside of the United States with a lag, consistent with a gradual information diffusion explanation of the predictive power of lagged U.S. returns.

  July 16, 2013   doi: 10.1111/jofi.12041   open full text
• Opening the Black Box: Internal Capital Markets and Managerial Power.
  Markus Glaser, Florencio Lopez‐De‐Silanes, Zacharias Sautner.
  The Journal of Finance. July 16, 2013
  We analyze the internal capital markets of a multinational conglomerate, using a unique panel data set of planned and actual allocations to business units and a survey of unit CEOs. Following cash windfalls, more powerful managers obtain larger allocations and increase investment substantially more than their less connected peers. We identify cash windfalls as a source of misallocation of capital, as more powerful managers overinvest and their units exhibit lower ex post performance and productivity. These findings contribute to our understanding of frictions in resource allocation within firms and point to an important channel through which power may lead to inefficiencies.

  July 16, 2013   doi: 10.1111/jofi.12046   open full text
• Cheap Credit, Lending Operations, and International Politics: The Case of Global Microfinance.
  Mark J. Garmaise, Gabriel Natividad.
  The Journal of Finance. July 16, 2013
  The provision of subsidized credit to financial institutions is an important and frequently used policy tool of governments and central banks. To assess its effectiveness, we exploit changes in international bilateral political relationships that generate shocks to the cost of financing for microfinance institutions (MFIs). MFIs that experience politically driven reductions in total borrowing costs hire more staff and increase administrative expenses. Cheap credit leads to greater profitability for MFIs and promotes a shift toward noncommercial loans but has no effect on total overall lending. Instead, the additional resources are either directed to promoting future growth or dissipated.

  July 16, 2013   doi: 10.1111/jofi.12045   open full text
• Law, Stock Markets, and Innovation.
  James R. Brown, Gustav Martinsson, Bruce C. Petersen.
  The Journal of Finance. July 16, 2013
  We study a broad sample of firms across 32 countries and find that strong shareholder protections and better access to stock market financing lead to substantially higher long‐run rates of R&D investment, particularly in small firms, but are unimportant for fixed capital investment. Credit market development has a modest impact on fixed investment but no impact on R&D. These findings connect law and stock markets with innovative activities key to economic growth, and show that legal rules and financial developments affecting the availability of external equity financing are particularly important for risky, intangible investments not easily financed with debt.

  July 16, 2013   doi: 10.1111/jofi.12040   open full text
• The Determinants of Attitudes toward Strategic Default on Mortgages.
  Luigi Guiso, Paola Sapienza, Luigi Zingales.
  The Journal of Finance. July 16, 2013
  We use survey data to measure households’ propensity to default on mortgages even if they can afford to pay them (strategic default) when the value of the mortgage exceeds the value of the house. The willingness to default increases in both the absolute and the relative size of the home‐equity shortfall. Our evidence suggests that this willingness is affected by both pecuniary and non‐pecuniary factors, such as views about fairness and morality. We also find that exposure to other people who strategically defaulted increases the propensity to default strategically because it conveys information about the probability of being sued.

  July 16, 2013   doi: 10.1111/jofi.12044   open full text
• Taxes, Theft, and Firm Performance.
  Maxim Mironov.
  The Journal of Finance. July 16, 2013
  This paper examines the interaction between income diversion and firm performance. Using unique Russian banking transaction data, I identify 42,483 spacemen, fly‐by‐night firms created specifically for income diversion. Next, I build a direct measure of income diversion for 45,429 companies and show that it is negatively related to firm performance. I identify the main reason for the observed effect as managerial diversion rather than tax evasion per se. I further show that stricter tax enforcement can improve firm performance: a one standard deviation increase in tax enforcement corresponds to an increase in the annual revenue growth rate of 2.6%.

  July 16, 2013   doi: 10.1111/jofi.12026   open full text
• The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage.
  François Derrien, Ambrus Kecskés.
  The Journal of Finance. July 16, 2013
  We study the causal effects of analyst coverage on corporate investment and financing policies. We hypothesize that a decrease in analyst coverage increases information asymmetry and thus increases the cost of capital; as a result, firms decrease their investment and financing. We use broker closures and broker mergers to identify changes in analyst coverage that are exogenous to corporate policies. Using a difference‐in‐differences approach, we find that firms that lose an analyst decrease their investment and financing by 1.9% and 2.0% of total assets, respectively, compared to similar firms that do not lose an analyst.

  July 16, 2013   doi: 10.1111/jofi.12042   open full text
• Organization Capital and the Cross‐Section of Expected Returns.
  Andrea L. Eisfeldt, Dimitris Papanikolaou.
  The Journal of Finance. July 16, 2013
  Organization capital is a production factor that is embodied in the firm's key talent and has an efficiency that is firm specific. Hence, both shareholders and key talent have a claim to its cash flows. We develop a model in which the outside option of the key talent determines the share of firm cash flows that accrue to shareholders. This outside option varies systematically and renders firms with high organization capital riskier from shareholders' perspective. We find that firms with more organization capital have average returns that are 4.6% higher than firms with less organization capital.

  July 16, 2013   doi: 10.1111/jofi.12034   open full text
• A Model of Shadow Banking.
  Nicola Gennaioli, Andrei Shleifer, Robert W. Vishny.
  The Journal of Finance. July 16, 2013
  We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry‐ups when investors neglect tail risks.

  July 16, 2013   doi: 10.1111/jofi.12031   open full text
• Financial Markets and Investment Externalities.
  Sheridan Titman.
  The Journal of Finance. July 16, 2013
  This address explores the link between financial market shocks, investment choices, and various externalities that can arise from these choices. My analysis, which emphasizes differences between shocks to debt and equity markets, provides insights about some stylized facts from the macro finance literature. These insights are illustrated with a discussion of the technology boom and bust in the late 1990s and early 2000s, and the housing boom and bust in the mid‐2000s.

  July 16, 2013   doi: 10.1111/jofi.12072   open full text
• Exit as Governance: An Empirical Analysis.
  Sreedhar T. Bharath, Sudarshan Jayaraman, Venky Nagar.
  The Journal of Finance. June 13, 2013
  Recent theory posits a new governance channel available to blockholders: threat of exit. Threat of exit, as opposed to actual exit, is difficult to measure directly. However, a crucial property is that it is weaker when stock liquidity is lower and vice versa. We use natural experiments of financial crises and decimalization as exogenous shocks to stock liquidity. Firms with larger blockholdings experience greater declines (increases) in firm value during the crises (decimalization), particularly if the manager's wealth is sensitive to the stock price and thus to exit threats. Additional tests suggest exit threats are distinct from blockholder intervention. This article is protected by copyright. All rights reserved.

  June 13, 2013   doi: 10.1111/jofi.12073   open full text
• Optimal CEO Compensation with Search: Theory and Empirical Evidence.
  Melanie Cao, Rong Wang.
  The Journal of Finance. May 27, 2013
  We integrate an agency problem into search theory to study executive compensation in a market equilibrium. A CEO can choose to stay or quit and search after privately observing an idiosyncratic shock to the firm. The market equilibrium endogenizes CEOs' and firms' outside options and captures contracting externalities. We show that the optimal pay‐to‐performance ratio is less than one even when the CEO is risk neutral. Moreover, the equilibrium pay‐to‐performance sensitivity depends positively on a firm's idiosyncratic risk and negatively on the systematic risk. Our empirical tests using executive compensation data confirm these results. This article is protected by copyright. All rights reserved.

  May 27, 2013   doi: 10.1111/jofi.12069   open full text
• Structural Shifts in Credit Rating Standards.
  Aysun Alp.
  The Journal of Finance. May 27, 2013
  I examine the time‐series variation in corporate credit rating standards from 1985 to 2007. A divergent pattern exists between investment‐grade and speculative‐grade rating standards from 1985 to 2002 as investment‐grade standards tighten and speculative‐grade loosen. In 2002, a structural shift occurs towards more stringent ratings. Holding characteristics constant, firms experience a drop of 1.5 notches in ratings due to tightened standards from 2002 to 2007. Credit spread tests suggest that the variation in standards is not completely due to changes in the economic climate. Rating standards affect credit spreads. Loose ratings are associated with higher default rates. This article is protected by copyright. All rights reserved.

  May 27, 2013   doi: 10.1111/jofi.12070   open full text
• Uncertainty, Time‐Varying Fear, and Asset Prices.
  Itamar Drechsler.
  The Journal of Finance. May 20, 2013
  I construct an equilibrium model that captures salient properties of index option prices, equity returns, variance, and the risk‐free rate. A representative investor makes consumption and portfolio choice decisions that are robust to his uncertainty about the true economic model. He pays a large premium for index options because they hedge important model misspecification concerns, particularly concerning jump shocks to cash flow growth and volatility. A calibration shows that empirically consistent fundamentals and reasonable model uncertainty explain option prices and the variance premium. Time variation in uncertainty generates variance premium fluctuations, helping explain their power to predict stock returns. This article is protected by copyright. All rights reserved.

  May 20, 2013   doi: 10.1111/jofi.12068   open full text
• Corporate Diversification and the Cost of Capital.
  Rebecca N. Hann, Maria Ogneva, Oguzhan Ozbas.
  The Journal of Finance. May 20, 2013
  We examine whether organizational form matters for a firm's cost of capital. Contrary to conventional view, we argue that coinsurance among a firm's business units can reduce systematic risk through the avoidance of countercyclical deadweight costs. We find that diversified firms have on average a lower cost of capital than comparable portfolios of standalone firms. In addition, diversified firms with less correlated segment cash flows have a lower cost of capital, consistent with a coinsurance effect. Holding cash flows constant, our estimates imply an average value gain of approximately 5% when moving from the highest to the lowest cash flow correlation quintile. This article is protected by copyright. All rights reserved.

  May 20, 2013   doi: 10.1111/jofi.12067   open full text
• Self‐Fulfilling Liquidity Dry‐Ups.
  Frederic Malherbe.
  The Journal of Finance. May 15, 2013
  I analyze a model in which holding cash imposes a negative externality: it worsens future adverse selection in markets for long‐term assets, which impairs their role for liquidity provision. Adverse selection worsens when potential sellers of long‐term assets hold more cash because then fewer sales reflect cash needs, and proportionally more sales reflect private information. Moreover, future market illiquidity makes current cash holding more appealing. This feedback effect may result in hoarding behavior and a market breakdown, which I interpret as a self‐fulfilling liquidity dry‐up. This mechanism suggests that imposing liquidity requirements on financial institutions may backfire. This article is protected by copyright. All rights reserved.

  May 15, 2013   doi: 10.1111/jofi.12063   open full text
• Aggregate Risk and the Choice between Cash and Lines of Credit.
  Viral V. Acharya, Heitor Almeida, Murillo Campello.
  The Journal of Finance. May 13, 2013
  Banks can create liquidity for firms by pooling their idiosyncratic risks. As a result, bank lines of credit to firms with greater aggregate risk should be costlier and such firms opt for cash in spite of the incurred liquidity premium. We find empirical support for this novel theoretical insight. Firms with higher beta have a higher ratio of cash to credit lines and face greater costs on their lines. In times of heightened aggregate volatility, banks exposed to undrawn credit lines become riskier; bank credit lines feature fewer initiations, higher spreads and shorter maturity; and, firms’ cash reserves rise. This article is protected by copyright. All rights reserved.

  May 13, 2013   doi: 10.1111/jofi.12056   open full text
• Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies.
  Andrew Ellul, Vijay Yerramilli.
  The Journal of Finance. May 13, 2013
  We construct a risk management index (RMI) to measure the strength and independence of the risk management function at bank holding companies (BHCs). U.S. BHCs with higher RMI before the onset of the financial crisis have lower tail risk, lower nonperforming loans, and better operating and stock return performance during the financial crisis years. Over the period 1995 to 2010, BHCs with a higher lagged RMI have lower tail risk and higher return on assets, all else equal. Overall, these results suggest that a strong and independent risk management function can curtail tail risk exposures at banks. This article is protected by copyright. All rights reserved.

  May 13, 2013   doi: 10.1111/jofi.12057   open full text
• Consumption Volatility Risk.
  Oliver Boguth, Lars‐Alexander Kuehn.
  The Journal of Finance. May 13, 2013
  We show that time‐variation in macroeconomic uncertainty affects asset prices. Consumption volatility is a negatively priced source of risk for a wide variety of test portfolios. At the firm level, exposure to consumption volatility risk predicts future returns, generating a spread across quintile portfolios in excess of 7% annually. This premium is explained by cross‐sectional differences in the sensitivity of dividend volatility to consumption volatility. Stocks with volatile cash flows in uncertain aggregate times require higher expected returns. This article is protected by copyright. All rights reserved.

  May 13, 2013   doi: 10.1111/jofi.12058   open full text
• Corporate Innovations and Mergers and Acquisitions.
  Jan Bena, Kai Li.
  The Journal of Finance. May 13, 2013
  Using a large and unique patent‐merger data set over the period 1984 to 2006, we show that companies with large patent portfolios and low R&D expenses are acquirers, while companies with high R&D expenses and slow growth in patent output are targets. Further, technological overlap between firm pairs has a positive effect on transaction incidence, and this effect is reduced for firm pairs that overlap in product markets. We also show that acquirers with prior technological linkage to their target firms produce more patents afterwards. We conclude that synergies obtained from combining innovation capabilities are important drivers of acquisitions. This article is protected by copyright. All rights reserved.

  May 13, 2013   doi: 10.1111/jofi.12059   open full text
• Market Expectations in the Cross‐Section of Present Values.
  Bryan Kelly, Seth Pruitt.
  The Journal of Finance. May 13, 2013
  Returns and cash flow growth for the aggregate U.S. stock market are highly and robustly predictable. Using a single factor extracted from the cross‐section of book‐to‐market ratios, we find an out‐of‐sample return forecasting R2 of 13 at the annual frequency (0.9% monthly). We document similar out‐of‐sample predictability for returns on value, size, momentum, and industry portfolios. We present a model linking aggregate market expectations to disaggregated valuation ratios in a latent factor system. Spreads in value portfolios’ exposures to economic shocks are key to identifying predictability and are consistent with duration‐based theories of the value premium. This article is protected by copyright. All rights reserved.

  May 13, 2013   doi: 10.1111/jofi.12060   open full text
• Risk Management and Firm Value: Evidence from Weather Derivatives.
  Francisco Pérez‐González, Hayong Yun.
  The Journal of Finance. May 13, 2013
  This paper shows that active risk management policies lead to an increase in firm value. To identify the effect of hedging and to overcome endogeneity concerns, we exploit the introduction of weather derivatives as an exogenous shock to firms’ ability to hedge weather risks. This innovation disproportionately benefits weather‐sensitive firms, irrespective of their future investment opportunities. Using this natural experiment and data from energy firms, we find that derivatives lead to higher valuations, investments and leverage. Overall, our results demonstrate that risk management has real consequences on firm outcomes. This article is protected by copyright. All rights reserved.

  May 13, 2013   doi: 10.1111/jofi.12061   open full text
• Do Hedge Funds Manipulate Stock Prices?
  Itzhak Ben‐David, Francesco Franzoni, Augustin Landier, Rabih Moussawi.
  The Journal of Finance. May 13, 2013
  We provide evidence suggesting that some hedge funds manipulate stock prices on critical reporting dates. Stocks in the top quartile of hedge fund holdings exhibit abnormal returns of 0.30% on the last day of the quarter and a reversal of 0.25% on the following day. A significant part of the return is earned during the last minutes of trading. Analysis of intraday volume and order imbalance provides further evidence consistent with manipulation. These patterns are stronger for funds that have higher incentives to improve their ranking relative to their peers. This article is protected by copyright. All rights reserved.

  May 13, 2013   doi: 10.1111/jofi.12062   open full text
• Private and Public Merger Waves.
  Vojislav Maksimovic, Gordon Phillips, Liu Yang.
  The Journal of Finance. April 12, 2013
  We document that public firms participate more than private firms as buyers and sellers of assets in merger waves and their participation is affected more by credit spreads and aggregate market valuation. Public firm acquisitions realize higher gains in productivity, particularly for on‐the‐wave acquisitions and when the acquirer's stock is liquid and highly valued. Our results are not driven solely by public firms' better access to capital. Using productivity data from early in the firm's life, we find that better private firms subsequently select to become public. Initial size and productivity predict asset purchases and sales 10 and more years later. © 2013 This article is protected by copyright. All rights reserved.

  April 12, 2013   doi: 10.1111/jofi.12055   open full text
• The Effects of Stock Lending on Security Prices: An Experiment.
  Steven N. Kaplan, Tobias J. Moskowitz, Berk A. Sensoy.
  The Journal of Finance. April 09, 2013
  We examine the impact of short selling by conducting a randomized stock lending experiment. Working with a large, anonymous money manager, we create an exogenous and sizeable shock to the supply of lendable shares by taking high‐loan fee stocks in the manager's portfolio and randomly making available and withholding stocks from the lending market. The experiment ran in two independent phases: the first, from September 5 to 18, 2008, with over $580 million of securities lent; and the second, from June 5 to September 30, 2009, with over $250 million of securities lent. While the supply shocks significantly reduce market lending fees and raise quantities, we find no evidence that returns, volatility, skewness, or bid‐ask spreads are affected. The results provide novel evidence on the impact of shorting supply and do not indicate any adverse effects on stock prices from securities lending.

  April 09, 2013   doi: 10.1111/jofi.12051   open full text
• Debt Specialization.
  Paolo Colla, Filippo Ippolito, Kai Li.
  The Journal of Finance. April 09, 2013
  This paper examines debt structure using a new and comprehensive database on types of debt employed by public U.S. firms. We find that 85% of the sample firms borrow predominantly with one type of debt, and the degree of debt specialization varies widely across different subsamples—large rated firms tend to diversify across multiple debt types, while small unrated firms specialize in fewer types. We suggest several explanations for why debt specialization takes place, and show that firms employing few types of debt have higher bankruptcy costs, are more opaque, and lack access to some segments of the debt markets.

  April 09, 2013   doi: 10.1111/jofi.12052   open full text
• Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums.
  Loriano Mancini, Angelo Ranaldo, Jan Wrampelmeyer.
  The Journal of Finance. April 09, 2013
  We provide the first systematic study of liquidity in the foreign exchange market. We find significant variation in liquidity across exchange rates, substantial illiquidity costs, and strong commonality in liquidity across currencies and with equity and bond markets. Analyzing the impact of liquidity risk on carry trades, we show that funding (investment) currencies offer insurance against (exposure to) liquidity risk. A liquidity risk factor has a strong impact on carry trade returns from 2007 to 2009, suggesting that liquidity risk is priced. We present evidence that liquidity spirals may trigger these findings.

  April 09, 2013   doi: 10.1111/jofi.12053   open full text
• Product Market Threats, Payouts, and Financial Flexibility.
  Gerard Hoberg, Gordon Phillips, Nagpurnanand Prabhala.
  The Journal of Finance. April 01, 2013
  We examine how product market threats influence firm payout policy and cash holdings. Using firms' product text descriptions, we develop new measures of competitive threats. Our primary measure, product market fluidity, captures changes in rival firms' products relative to the firm's products. We show that fluidity decreases firm propensity to make payouts via dividends or repurchases and increases the cash held by firms, especially for firms with less access to financial markets. These results are consistent with the hypothesis that firms' financial policies are significantly shaped by product market threats and dynamics.

  April 01, 2013   doi: 10.1111/jofi.12050   open full text
• Mutual Fund Performance and the Incentive to Generate Alpha.
  Diane Guercio, Jonathan Reuter.
  The Journal of Finance. March 19, 2013
  To rationalize the well‐known underperformance of the average actively managed mutual fund, we exploit the fact that retail funds in different market segments compete for different types of investors. Within the segment of funds marketed directly to retail investors, we show that flows chase risk‐adjusted returns, and that funds respond by investing more in active management. Importantly, within this direct‐sold segment, we find no evidence that actively managed funds underperform index funds. In contrast, we show that actively managed funds sold through brokers face a weaker incentive to generate alpha and significantly underperform index funds.

  March 19, 2013   doi: 10.1111/jofi.12048   open full text
• Informed Trading through the Accounts of Children.
  Henk Berkman, Paul D. Koch, P. Joakim Westerholm.
  The Journal of Finance. March 19, 2013
  This study shows that the guardians behind underaged accounts are successful at picking stocks. Moreover, they tend to channel their best trades through the accounts of children, especially when they trade just before major earnings announcements, large price changes, and takeover announcements. Building on these results, we argue that the proportion of total trading activity through underaged accounts (labeled BABYPIN) should serve as an effective proxy for the probability of information trading in a stock. Consistent with this claim, we show that investors demand a higher return for holding stocks with a greater likelihood of private information, proxied by BABYPIN.

  March 19, 2013   doi: 10.1111/jofi.12043   open full text
• Pricing Model Performance and the Two‐Pass Cross‐Sectional Regression Methodology.
  Raymond Kan, Cesare Robotti, Jay Shanken.
  The Journal of Finance. February 15, 2013
  Over the years, many asset pricing studies have employed the sample cross‐sectional regression (CSR) R2 as a measure of model performance. We derive the asymptotic distribution of this statistic and develop associated model comparison tests, taking into account the impact of model misspecification on the variability of the CSR estimates. We encounter several examples of large R2 differences that are not statistically significant. A version of the intertemporal CAPM exhibits the best overall performance, followed by the three‐factor model of Fama and French (1993). Interest‐ ingly, the performance of prominent consumption CAPMs is sensitive to variations in experimental design.

  February 15, 2013   doi: 10.1111/jofi.12035   open full text
• Trading Complex Assets.
  Bruce Ian Carlin, Shimon Kogan, Richard Lowery.
  The Journal of Finance. January 30, 2013
  We perform an experimental study to assess the effect of complexity on asset trading. We find that higher complexity leads to increased price volatility, lower liquidity, and decreased trade efficiency especially when repeated bargaining takes place. However, the channel through which complexity acts is not simply due to the added noise induced by estimation error. Rather, complexity alters the bidding strategies used by traders, making them less inclined to trade, even when we control for estimation error across treatments. As such, it appears that adverse selection plays an important role in explaining the trading abnormalities caused by complexity.

  January 30, 2013   doi: 10.1111/jofi.12029   open full text
• The TIPS—Treasury Bond Puzzle*.
  Matthias Fleckenstein, Francis A. Longstaff, Hanno Lustig.
  The Journal of Finance. January 30, 2013
  We show that the price of a Treasury bond and an inflation‐swapped TIPS issue exactly replicating the cash flows of the Treasury bond can differ by more than $20 per $100 notional. Treasury bonds are almost always overvalued relative to TIPS. Total TIPS–Treasury mispricing has exceeded $56 billion, representing nearly 8% of the total amount of TIPS outstanding. We find direct evidence that the mispricing narrows as additional capital flows into the markets. This provides strong support for the slow‐moving‐capital explanation of arbitrage persistence.

  January 30, 2013   doi: 10.1111/jofi.12032   open full text