Presidential Address: The Cost of Active Investing
Pages: 1537-1573 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01368.x | Cited by: 609
KENNETH R. FRENCH
I compare the fees, expenses, and trading costs society pays to invest in the U.S. stock market with an estimate of what would be paid if everyone invested passively. Averaging over 1980–2006, I find investors spend 0.67% of the aggregate value of the market each year searching for superior returns. Society's capitalized cost of price discovery is at least 10% of the current market cap. Under reasonable assumptions, the typical investor would increase his average annual return by 67 basis points over the 1980–2006 period if he switched to a passive market portfolio.
Back to the Beginning: Persistence and the Cross‐Section of Corporate Capital Structure
Pages: 1575-1608 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01369.x | Cited by: 1194
MICHAEL L. LEMMON, MICHAEL R. ROBERTS, JAIME F. ZENDER
We find that the majority of variation in leverage ratios is driven by an unobserved time‐invariant effect that generates surprisingly stable capital structures: High (low) levered firms tend to remain as such for over two decades. This feature of leverage is largely unexplained by previously identified determinants, is robust to firm exit, and is present prior to the IPO, suggesting that variation in capital structures is primarily determined by factors that remain stable for long periods of time. We then show that these results have important implications for empirical analysis attempting to understand capital structure heterogeneity.
Asset Growth and the Cross‐Section of Stock Returns
Pages: 1609-1651 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01370.x | Cited by: 1086
MICHAEL J. COOPER, HUSEYIN GULEN, MICHAEL J. SCHILL
We test for firm‐level asset investment effects in returns by examining the cross‐sectional relation between firm asset growth and subsequent stock returns. Asset growth rates are strong predictors of future abnormal returns. Asset growth retains its forecasting ability even on large capitalization stocks. When we compare asset growth rates with the previously documented determinants of the cross‐section of returns (i.e., book‐to‐market ratios, firm capitalization, lagged returns, accruals, and other growth measures), we find that a firm's annual asset growth rate emerges as an economically and statistically significant predictor of the cross‐section of U.S. stock returns.
Pages: 1653-1678 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01371.x | Cited by: 1392
EUGENE F. FAMA, KENNETH R. FRENCH
The anomalous returns associated with net stock issues, accruals, and momentum are pervasive; they show up in all size groups (micro, small, and big) in cross‐section regressions, and they are also strong in sorts, at least in the extremes. The asset growth and profitability anomalies are less robust. There is an asset growth anomaly in average returns on microcaps and small stocks, but it is absent for big stocks. Among profitable firms, higher profitability tends to be associated with abnormally high returns, but there is little evidence that unprofitable firms have unusually low returns.
Corporate Governance and Risk‐Taking
Pages: 1679-1728 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01372.x | Cited by: 1083
KOSE JOHN, LUBOMIR LITOV, BERNARD YEUNG
Better investor protection could lead corporations to undertake riskier but value‐enhancing investments. For example, better investor protection mitigates the taking of private benefits leading to excess risk‐avoidance. Further, in better investor protection environments, stakeholders like creditors, labor groups, and the government are less effective in reducing corporate risk‐taking for their self‐interest. However, arguments can also be made for a negative relationship between investor protection and risk‐taking. Using a cross‐country panel and a U.S.‐only sample, we find that corporate risk‐taking and firm growth rates are positively related to the quality of investor protection.
Hedge Fund Activism, Corporate Governance, and Firm Performance
Pages: 1729-1775 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01373.x | Cited by: 1081
ALON BRAV, WEI JIANG, FRANK PARTNOY, RANDALL THOMAS
Using a large hand‐collected data set from 2001 to 2006, we find that activist hedge funds in the United States propose strategic, operational, and financial remedies and attain success or partial success in two‐thirds of the cases. Hedge funds seldom seek control and in most cases are nonconfrontational. The abnormal return around the announcement of activism is approximately 7%, with no reversal during the subsequent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism. Our analysis provides important new evidence on the mechanisms and effects of informed shareholder monitoring.
Hedge Funds: Performance, Risk, and Capital Formation
Pages: 1777-1803 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01374.x | Cited by: 453
WILLIAM FUNG, DAVID A. HSIEH, NARAYAN Y. NAIK, TARUN RAMADORAI
We use a comprehensive data set of funds‐of‐funds to investigate performance, risk, and capital formation in the hedge fund industry from 1995 to 2004. While the average fund‐of‐funds delivers alpha only in the period between October 1998 and March 2000, a subset of funds‐of‐funds consistently delivers alpha. The alpha‐producing funds are not as likely to liquidate as those that do not deliver alpha, and experience far greater and steadier capital inflows than their less fortunate counterparts. These capital inflows attenuate the ability of the alpha producers to continue to deliver alpha in the future.
The Selection and Termination of Investment Management Firms by Plan Sponsors
Pages: 1805-1847 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01375.x | Cited by: 152
AMIT GOYAL, SUNIL WAHAL
We examine the selection and termination of investment management firms by 3,400 plan sponsors between 1994 and 2003. Plan sponsors hire investment managers after large positive excess returns but this return‐chasing behavior does not deliver positive excess returns thereafter. Investment managers are terminated for a variety of reasons, including but not limited to underperformance. Excess returns after terminations are typically indistinguishable from zero but in some cases positive. In a sample of round‐trip firing and hiring decisions, we find that if plan sponsors had stayed with fired investment managers, their excess returns would be no different from those delivered by newly hired managers. We uncover significant variation in pre‐ and post‐hiring and firing returns that is related to plan sponsor characteristics.
Optimal Decentralized Investment Management
Pages: 1849-1895 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01376.x | Cited by: 117
JULES H. Van BINSBERGEN, MICHAEL W. BRANDT, RALPH S. J. KOIJEN
We study an institutional investment problem in which a centralized decision maker, the Chief Investment Officer (CIO), for example, employs multiple asset managers to implement investment strategies in separate asset classes. The CIO allocates capital to the managers who, in turn, allocate these funds to the assets in their asset class. This two‐step investment process causes several misalignments of objectives between the CIO and his managers and can lead to large utility costs for the CIO. We focus on (1) loss of diversification, (2) unobservable managerial appetite for risk, and (3) different investment horizons. We derive an optimal unconditional linear performance benchmark and show that this benchmark can be used to better align incentives within the firm. We find that the CIO's uncertainty about the managers' risk appetites increases both the costs of decentralized investment management and the value of an optimally designed benchmark.
Pages: 1897-1937 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01377.x | Cited by: 187
UGUR LEL, DARIUS P. MILLER
We examine a primary outcome of corporate governance, namely, the ability to identify and terminate poorly performing CEOs, to test the effectiveness of U.S. investor protections in improving the corporate governance of cross‐listed firms. We find that firms from weak investor protection regimes that are cross‐listed on a major U.S. Exchange are more likely to terminate poorly performing CEOs than non‐cross‐listed firms. Cross‐listings on exchanges that do not require the adoption of stringent investor protections (OTC, private placements, and London listings) are not associated with a higher propensity to remove poorly performing CEOs.
Feedback Effects and Asset Prices
Pages: 1939-1975 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01378.x | Cited by: 83
EMRE OZDENOREN, KATHY YUAN
Feedback effects from asset prices to firm cash flows have been empirically documented. This finding raises a question for asset pricing: How are asset prices determined if price affects fundamental value, which in turn affects price? In this environment, by buying assets that others are buying, investors ensure high future cash flows for the firm and subsequent high returns for themselves. Hence, investors have an incentive to coordinate, which may generate self‐fulfilling beliefs and multiple equilibria. Using insights from global games, we pin down investors' beliefs, analyze equilibrium prices, and show that strong feedback leads to higher excess volatility.
Economic Links and Predictable Returns
Pages: 1977-2011 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01379.x | Cited by: 942
LAUREN COHEN, ANDREA FRAZZINI
This paper finds evidence of return predictability across economically linked firms. We test the hypothesis that in the presence of investors subject to attention constraints, stock prices do not promptly incorporate news about economically related firms, generating return predictability across assets. Using a data set of firms' principal customers to identify a set of economically related firms, we show that stock prices do not incorporate news involving related firms, generating predictable subsequent price moves. A long–short equity strategy based on this effect yields monthly alphas of over 150 basis points.
Market Liquidity, Investor Participation, and Managerial Autonomy: Why Do Firms Go Private?
Pages: 2013-2059 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01380.x | Cited by: 88
ARNOUD W. A. BOOT, RADHAKRISHNAN GOPALAN, ANJAN V. THAKOR
We focus on public‐market investor participation to analyze the firm's decision to stay public or go private. The liquidity of public ownership is both a blessing and a curse: It lowers the cost of capital, but also introduces volatility in a firm's shareholder base, exposing management to uncertainty regarding shareholder intervention in management decisions, thereby affecting the manager's perceived decision‐making autonomy and curtailing managerial inputs. We extract predictions about how investor participation affects stock price level and volatility and the public firm's incentives to go private, providing a link between investor participation and firm participation in public markets.
Report of the Editor of The Journal of Finance for the Year 2007
Pages: 2061-2074 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01381.x | Cited by: 0
CAMPBELL R. HARVEY
Minutes of the Annual Membership Meeting January 5, 2008
Pages: 2075-2076 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01383.x | Cited by: 0
Report of the Executive Secretary and Treasurer for the Year Ending September 30, 2007
Pages: 2077-2079 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01382.x | Cited by: 0
Pages: 2081-2082 | Published: 7/2008 | DOI: 10.1111/j.1540-6261.2008.01384.x | Cited by: 0