Forthcoming Articles

The Dividend Disconnect

Published: 05/13/2019   |   DOI: 10.1111/jofi.12785

SAMUEL M. HARTZMARK, DAVID H. SOLOMON

Many individual investors, mutual funds, and institutions trade as if dividends and capital gains are disconnected attributes, not fully appreciating that dividends result in price decreases. Behavioral trading patterns (e.g., the disposition effect) are driven by price changes instead of total returns. Investors rarely reinvest dividends, and trade as if dividends are a separate, stable income stream. Analysts fail to account for the effect of dividends on price, leading to optimistic price forecasts for dividend‐paying stocks. Demand for dividends is systematically higher in periods of low interest rates and poor market performance, leading to lower returns for dividend‐paying stocks.


Measuring Institutional Investors’ Skill at Making Private Equity Investments

Published: 05/06/2019   |   DOI: 10.1111/jofi.12783

DANIEL R. CAVAGNARO, BERK A. SENSOY, YINGDI WANG, MICHAEL S. WEISBACH

Using a large sample of institutional investors’ investments in private equity funds raised between 1991 and 2011, we estimate the extent to which investors’ skill affects their returns. Bootstrap analyses show that the variance of actual performance is higher than would be expected by chance, suggesting that some investors consistently outperform. Extending the Bayesian approach of Korteweg and Sorensen (2017), we estimate that a one standard deviation increase in skill leads to an increase in annual returns of between one and two percentage points. These results are stronger in the earlier part of the sample period and for venture funds.


Nonlinearity and Flight‐to‐Safety in the Risk‐Return Tradeoff for Stocks and Bonds

Published: 04/17/2019   |   DOI: 10.1111/jofi.12776

TOBIAS ADRIAN, RICHARD K. CRUMP, ERIK VOGT

We document a highly significant, strongly nonlinear dependence of stock and bond returns on past equity market volatility as measured by the VIX. We propose a new estimator for the shape of the nonlinear forecasting relationship that exploits variation in the cross‐section of returns. The nonlinearities are mirror images for stocks and bonds, revealing flight‐to‐safety: expected returns increase for stocks when volatility increases from moderate to high levels while they decline for Treasuries. These findings provide support for dynamic asset pricing theories in which the price of risk is a nonlinear function of market volatility.